Pondering Energy

I've spent a bit of time pondering bigger picture aspects of what we've seen since the calendar rolled into fall.  I'm not quite ready to put all of my thoughts out here yet but there is one thing that stands out and that's the decline {some might say crash} in oil and energy related stocks.  Here's a chart of the energy sector ETF, XLE to illustrate what I'm talking about. {Chart comes from FINVIZ.com.}

The decline here represents a bit over 20% since the summer highs with most of that coming since Labor Day.  The decline has also accelerated in the past week.  There's a lot that this could say about the global economy and much of that would be negative.  Lower energy prices have traditionally been associated with lower global economic growth rates or over production.  I think there's something to that as we know that growth has slowed overseas.  But I also wonder if any of the following is starting to also have an impact.

Gasoline sales that plateaued for years here in the US have collapsed in the past decade.  Add to that cars get much better mileage today than they did ten years ago and the fact that millennials seem to have no interest in driving or at least not as much as their parents did at their age.  I had three young people in their 20's over the weekend visiting my house.  Only one of them needs a car for work and even he doesn't drive all the time, spending three out of five days working from home. 

The cost of solar power continues to dramatically decline.  Renewable energy is also finding increasing acceptance.  The wind farms along I-65 between Chicago and Indianapolis are evidence of this.  

Energy prices will not decline forever and this sector is currently over sold, but I'm beginning to wonder longer term if we've reached a tipping point in how we're going to look at energy.  On another level the decline in energy costs is not a bad thing.

"Business Insider" quotes Deutsche Banc's  Joe LaVorgna who notes that "every one cent change in the price of a gallon of gas is worth approximately $1 billion in annual US household energy expenditures".  That savings according to LaVorgna in the same article is an annualized rate of $40 billion or the equivalent of almost three-tenths on annualized GDP  growth.   The chart above also from the same article shows a high correlation between the change in retail gas prices and the change in household energy consumption.   That's real savings and is likely to be reflected later on in other levels of the economy.  

*Long ETFs related to energy in certain client and personal accounts depending on client risk/reward perimeters and portfolio strategies.