It’s a “We” World After All: Inside WeWork’s $20 Billion Valuation

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In September 2017, WeWork became the sixth most valuable startup in the world. The co-working company takes on long-term leases for raw office space and builds out the interior into trendy, millennial friendly spaces that are then subleased to Fortune 500 companies and startups alike, one conference room or desk at a time.

 

To provide a sense of WeWork’s fast-spreading dominance, the startup has dazzled tech investors by portraying itself as a Silicon Valley-style company that serves as a “physical social network” for millennials. It has raised over $8 billion to date, accruing over $4.4 billion through the Japanese tech giant SoftBank’s Vision Fund in 2017 alone. Additionally, it was valued at $20 billion this year, which is the largest valuation in New York City and the third biggest startup valuation in the United States after Uber, Airbnb and SpaceX.

The impressive valuation of a startup – which coincidentally encourages the startup lifestyle – is worth more than Twitter ($12.96 billion), Box ($2.44 billion), and Blue Apron ($1.54 billion) combined, Business Insider reported. Yet, industry experts, professors, and the general public has been left scratching their heads whether the co-working giant can justify its grandiose appraisal. With a $20 billion valuation that is eight times that of a traditional leasing company with a similar business model warrants a major question: is WeWork overvalued?

 

First, let’s take a look at how WeWork came to be the highly talked about startup it is today.

 

CEO Adam Neumann was born in Isreal and moved to the United States in 2001 after serving as a naval officer in the Israeli military. “Before I started WeWork, I owned a baby clothing company based in Dumbo, Brooklyn,” he said in an interview with Business Insider. The company, called Krawlers, sold clothes fit with padded knees for crawling babies. “We were working in the same building as my co-founder Miguel McKelvey, a lead architect at a small firm. At the time, I was misguided and putting my energy into all the wrong places” he said.

McKelvey and Neumann noticed that the building they both worked in was partially vacant. With the combination of their individual architectural and entrepreneurial expertise, they came up with the idea to open a co-working space for other entrepreneurs. Although it took tremendous convincing of their landlord, McKelvey and Neumann opened the first floor of a co-working startup called Green Desk in 2008 – the early incarnation of the company that would contrive WeWork. The “green” in the name was inspired by the company’s focus on sustainable co-working spaces featuring recycled furniture and electricity that came from wind power.

 

Despite Green Desks near-instant success, Neumann and McKelvey eventually sold the business to their landlord, Joshua Guttman. The WeWork co-founders recognized the importance of being green, but felt the focus of their business should revolve around community. The two founders knew they were onto something and possessed a strong concept. After pocketing “a few million” from the Green Desk sale, the two men founded and launched WeWork.

 

WeWork, in its current iteration, opened its doors to New York City entrepreneurs in April 2011 and has since expanded to cities across the country and worldwide.

 

At WeWork offices, options include a single desk in an open floorplan, dedicated private offices with doors, and full floors for more established companies. Amazon.com Inc. and International Business Machines Corp. have both taken advantage of the entire-floor leasing option. Common spaces feature comfortable couches, fun and interactive amenities like foosball tables and beer kegs to encourage meetings and socializing, and various office events take place frequently.

 

Moving on, we must raise another question: what industry is WeWork in exactly?

 

Neumann has blatantly denounced defining WeWork as a real-estate company or tech company. The “We Generation,” as he calls it, strives to encourage sharing and collaboration rather than isolated office places. Neumann instructed the WeWork Public Relations representatives to push back against any characterization in the media of WeWork as a myopically defined real-estate company and instead encouraged the description of WeWork as a “lifestyle” or “community-focused” company.

 

In an interview with the Wall Street Journal, Artie Minson, WeWork’s president and chief financial officer said, “we frankly are our own category. We use real estate and services to empower our community.” Minson supported the company’s sky-high valuation, stating it made sense because investors are looking to WeWork’s plans for growth and confident in the acquisition of millions of members in the future.

 

The WeWork client is “coming to (the company) for energy, for culture” Neuman stated at an event this summer, aiming to breakaway from a pigeonholed industry classification. The Wall Street Journal reported that Neumann and other WeWork executives described the company “at various times… as a community company, a lifestyle company and a platform for entrepreneurs.”

 

Neumann went on to add, “we ourselves are still discovering what is the best type of company that we want to be. We’re taking the best practices out of the for-profit world and best practices out of the nonprofit world.”

 

Skeptics continue to question whether WeWork should receive the tech company treatment, especially in valuation, when real estate is so integral to its main product and subsidiaries. In addition to co-working space, WeWork dabbles in communal housing, early education, and, strangely, a wave pool business.

WeLive, WeWork’s attempt to infiltrate the residential real estate industry, features shared expansive kitchens, large laundry rooms with ping pong tables and other interactive amenities, and free WeWork cocktails on rooftop terraces and in mail-room themed bars. That’s right, what serves as the WeLive mailroom during the day is converted into a happening bar at night designed to bring the inhabitants together to socialize and expand their network.

Bloomberg Technology noted that “WeWork wants to parlay its success with co-working into a “we” lifestyle brand that incorporates not just work but living and wellness for community-minded people.

 

Similar to other tech-giant influencers like Facebook’s Mark Zuckerberg, the WeWork co-founders have taken a keen interest in early education. In Fall 2018, the company is set to open a private elementary school for “conscious entrepreneurship” inside an New York City WeWork space. The experimental school was tested via a pilot program of seven students, including one of the five children of WeWork Co-founder Adam and Rebekah Neumann.

 

The project is being spearheaded mostly by Rebekah Neumann, who attended the prestigious New York City prep school Horace Mann and received a bachelor’s degree in Buddhism and business from Cornell University. She told Bloomberg the school will “(rethink) the whole idea of what an education means” but is “non-compromising” on academic standards.

 

“In my book,” she stated, “there’s no reason why children in elementary schools can’t be launching their own businesses.” Can anyone say, “Baby Boss?”

 

The most peculiar industry expansion for WeWork, however, was the purchase of a “large stake” in Wavegarden, a wave-pool start up. It remains unclear how Wavegarden’s technology, which can produce up to eight-foot-high waves for surfing at various water facilities, fits with WeWork’s common-space persona. A company spokesperson told the Wall Stret Journal that WeWork has “made meaningful investments to significantly enhance (the company’s) product offering.”

 

Throughout the various expansions and acquisitions of the WeWork brand, one narrative has remained the same: “the “we” brand promotes a seamless integration of meaningful work and a purpose-driven existence.

 

The “We” model has proved popular. As of October this year, WeWork established itself in 172 locations in 18 countries, granting its 150,000 a variety of locations to work from. The workspace provider employs over 3,000 people. The startup is rounding out the year with an impressive purchase of the social network company Meetup which strives to connect individuals during their off-work hours based on common interests. WeWork hopes the acquisition will help establish a sense of community in its shared workspaces, Inc. reported. The most valuable component of the purchase, however, is Meetup’s 35 million user base.

Some Silicon Valley investors and others in the real-estate industry say the company’s well-crafted image belies the unremarkable nature of its business. For instance, let’s consider WeWork’s competitors. With an indeterminate identity, it is hard to say just who WeWork’s competitors are or if the company even has any contenders due to its multitude of market engagements. IWG PLC, an office-leasing company with a similar business model to WeWork, manages five times the square footage and has approximately one-eighth the market value. Boston Properties Inc., the United State’s largest publically traded office leaser, owns five times the square footage that WeWork leases and manages while boasting a market capitalization of $19 billion.

 

Barry Sternlicht, who runs Starwood Capital Group LLC with more than $50 billion of real-estate assets under management, said, “if you had positioned (WeWork) as a real-estate company, it wouldn’t be worth (its valuation).” Neumann “dressed it up and made it into a community, and that turned it into a tech play” he said.

One argument against WeWork surrounds it’s “expanding” clientele base. A large portion of WeWorks client base is comprised of startups. If there were to be a downturn in the market, it would become increasingly difficult for startups to raise funding. If startups don’t have the funding necessary to sustain themselves, WeWork might run into trouble staying profitable with a decrease in leasing demand as its clients wouldn’t be able to pay the rent for the office space.

 

WeWork was swift to negate any doomsday arguments, stating that only a small fraction of its client base are other tech startups. “Venture capital-backed companies only makeup mid-single digit of the total population of our WeWork member companies,” a spokesperson told Business Insider. “The membership is very diversified across multiple industries and our fastest growing segment is larger, more mature companies who have joined for the value proposition of more affordable space, community, networking, and flexibility – as well as services (healthcare, payment processing, etc.)”.

 

Despite the company’s efforts to assuage any skepticism, many academics and industry experts remain unsold. Consider the passionate words of Scott Galloway, a marketing professor at the NYU Stern School of Business and the founder of business intelligence firm L2, said in a Business Insider presentation, “WeWork is arguably the most overvalued company in the world. WeWork is now getting a valuation equivalent of $550,000 per customer… In some instances, WeWork – if you do the math – the floor that the WeWork (office) leases in a building is worth more than the building hosting the WeWork.”

 

Galloway went on to compare the co-working space to other tech companies like Snap, Inc. and Twitter, “Snap is incredibly overvalued, WeWork is incredibly overvalued, and a company that’s off (its market estimation) 70%, Twitter, is still massively overvalued. (Twitter) is a stock that will be trading for between five and ten bucks within six to 12 months. Two and a half years ago, when it was at 55 (dollars per share), I said it would be below ten, and I was wrong, it’ll be below five.

 

It is unclear whether WeWork will have a similar rocky post-valuation experience to Twitter and Snap, Inc. with so much tech industry confidence balancing out the vocal skepticism.

 

From WeWork’s commencing days, Neumann would preemptively boast about how he was building a $100 billion business to his friends. With a $20 billion valuation under WeWork’s belt, the co-founder’s brag might not be terribly outlandish after all. Does the company actually deserve its high appraisal? Will WeWork be a startup that simply dazzled the tech industry in its 15-seconds of fame? Only time will tell, but for now, WeWork is confidently looking towards the future and not letting criticism get in its way.

Go Big or Go Home: Many Too Big to Fail Banks Just Got Bigger

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Are U.S. banks too big to fail, or are they simply too big to break up?

The economic crisis in 2008 revealed how financially unstable big banks can hold the entire global economy hostage. The concept of these banks being “Too Big To Fail,” meaning a business has become so large that a government will provide assistance to prevent its failure to avoid a disastrous residual ripple effect throughout the economy, was integral during this time. The U.S. government disbursed over $700 billion to save companies like AIG that were on the verge of financial failure.

 

The tremendous monetary support that was necessary during 2008 increased government regulation of Wall Street significantly and set out to decrease the mammoth of preexisting too big to fail institutions. However, while increased regulation has been realized over the past decade since the crisis, too big to fail banks have not been cut down to size. Rather, the system has gotten even bigger. According to SNL Financial, JPMorgan Chase, the top performing bank in total assets, has seen its base increase to more than $2.5 trillion. Since the end of 2008, JPMorgan’s deposit base alone has grown by over 29 percent. With such promising numbers, JPMorgan is considered to sit atop a list of banks that could threaten global stability.

 

JPMorgan, Wells Fargo, Citigroup and Bank of America, the so-called “Big Four” institutions, all show this same upward trend since 2008, with over $8.2 trillion in total assets, which is 154 percent more than re rest of the top 50 banks combined.

 

To avoid another round of unfavorable bailouts, financial watchdogs have been calling too big to fail banks to make themselves less risky by dividing up and adding significant capital to safeguard against losses. However, amid demands to break into smaller entities, top Goldman Sachs analyst Richard Ramsden claimed that the government’s call to divide JPMorgan into two or four parts would greatly diminish value for shareholders.

 

According to an S&P Global Market Intelligence report, “if and when another crisis hits, the biggest players will be far larger than they were in the last crash.” Still, approximately 75 percent of the 30 largest too big to fail banks are significantly bigger than a decade ago.

 

Conversely, government experts find the increase in banks’ total assets promising. In her announcement resigning from the U.S. central bank, Janet Yellen wrote, “I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability.”

 

This past June, the Treasury Department published several recommended changes to regulation intended to prevent “taxpayer-funded bailouts.” The paper called for “eliminating regulation that fosters the creation… of too big to fail institutions” but offered to suggestions on how to alter those already present.

 

Only time will tell whether the maintained presence of too big to fail institutions will hurt or benefit the U.S. and global economy.

Brexit Trade Implications: What Now?

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Following the referendum held on Thursday, June 23, 2016 to decide whether the UK should leave or remain in the European Union, the entire world questioned what Britain’s exit from the EU would actually entail for British – and global – businesses. While there are many moving parts still up in the air, one thing is certain: Britain will have to reach a new trade agreement with the European Union. This task will be highly complex and be carried out under the immense pressure of a two-year deadline.

 

Once the United Kingdom’s formal decision to leave the European Union was notified to the European council of EU leaders, under article 50 of the Libson treaty, the UK was given a formal notice of leave from the EU. Article 50 demands a two-year timeframe for the UK to renegotiate a new legal basis for trade relationships with the remainder of the EU (however, it does enable an extension if needed).

 

The trade discussions must consider the framework for exporting and importing goods, like food and cars, two very important imports and exports for the UK, and the basis for continued services trade, such as legal advice on a big company takeover to and from the EU. Britain’s trade negotiations also must ponder changes to customs procedures, passport controls for business travel, and regulation on safety standards, health and environmental issues.

 

All the aforementioned decisions, however, are contingent upon whether or not Britain undergoes a “hard” or “soft” Brexit, said BBC News.  Hard and soft are terms that were used increasingly in  debates focused on the circumstances of the UK’s departure from the EU. While there is no concrete definition for either term, they are commonly used to refer to the closeness of the UK’s continued relationship with the EU following Brexit. On one end of the spectrum, a “hard” Brexit would entail the UK refusing to comprise on issues like the free movement of people, even if it meant leaving the single market. On the other extreme, a “soft” Brexit would more closely resemble Norway, which holds a single market (as opposed to a common market with free trade) and is forced to accept the free movement of people as a result.

 

According to The Guardian, it will be challenging for the UK to pull off a trade deal in a meager two years, particularly if the option of joining the European Economic Area (EEA) is pursued, but the British government is hesitant to accept any freedom of movement as a quid pro quo.

 

While the entire idea behind Brexit is to instill change within the British government and trade policies, John Forrest, the head of internal trade at DLA Piper law firm told The Guardian, he did not think having the UK continue carrying on trading with the EU under the same free movement principles is out of the question. “…that means freedom of movement for goods, people and capital between the UK and EU will continue to operate.” For the millions of people who campaigned and voted for leaving the EU on that Thursday in June of 2016, this possibility will be a tough pill to swallow.

 

“Struck Oil!” Oil Prices Are on the Rise, But How Long Will the Sunup Last?

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Oil markets are positioned for yet another wild ride. With academic and Wall Street analysts predicting prices of anywhere ranging from $40 to $70 per barrel by the end of the year, oil is looking far more handsome to investors. Over the last two and a half years, the industry experienced its deepest downtown since the 1990s. When using the past as a guide, after every oil bust comes a significant recovery, if not a market boom. With much volatility surrounding pricing numbers alone, analysts and the public seem to only focus on the cost of the everyday essential commodity. This almost myopic focus leaves one resounding question unanswered: what is the future of oil demand?

 

According to the World Petroleum Council, Oil is one of the most important raw materials humans have access to on this planet. Every day, hundreds of goods and services are used that are either sourced from or contingent upon oil and gas. Thus, it comes as no surprise that oil and gas are also important due to the large number of jobs they provide. According to Economics Online, in 2016, the United States produced an average of approximately 8.9 million barrels of crude oil per day, which means about $3.9 million a day for U.S. citizens.  A total of 7.21 billion barrels of petroleum products were consumed that same year, reflecting significant demand for the resource.

 

One of the most basic, yet most important economic principles is the law of demand. This edict states that, if all alternative factors remain equal, the higher the price of a good, the less the demand for that good will be. Essentially, the higher the price, the lower the quantity demanded. With demand increasing in the advanced OECD (Organization for Economic Cooperation and Development) economies, which comprise approximately 66 percent of total global demand, one could consider the implications of the recent upturn in oil market prices. Between 1980 and 2008, world oil demand increased by 40 percent, from 60 million barrels per day to over 85 million barrels, Forbes reported.

 

According to the Industry Tends section of PwC’s Strategy&, recent oil price cans can be attributed to a rebalancing of supply and demand fundamentals, which were accelerated by the Organization of Petroleum Exporting Countries’ (OPEC) recent decision to cut production. Wall Street and academic analysts vocalized confidence that these price gains are expected to remain in place. According to Barclay’s latest E&P Spending Survey, oil and gas industry capital expenditures are anticipated to increase by up to seven percent by the end of 2017. Additionally, global rig counts, particularly in the United States, have been quickly on the rise since the middle of 2016, stated Baker Hughes, one of the world’s largest oil field service companies.

 

Yet, when delving deeper in the background surrounding demand for oil, it is evident that the demand for the resource has historically been relatively inelastic with respect to price in, given that oil has very few direct substitutes. Contrastingly, however, an obvious problem when predicting the effects of oil-price movements is that the decrease in global price could result from either an increase in global supply or decrease in global demand.

 

It is important to note that with a significant portion of the global economy flowing through oil, if the demand were to shift, the world power balance would follow suit. While a great deal of activity in the oil and gas sector is focused on OPEC countries and the U.S., other regions will likely play key roles in the coming years. To illustrate, the investment environment in Latin America is rapidly improving. Some domestic oil and gas industries are on an upswing, stimulating and creating jobs.

 

An excellent example of this is Mexico, where energy reform is currently opening the door for more nontraditional oil and gas operators to establish a presence in the country. Companies successfully bidding for acreage in the recent Deepwater auction in that country include China’s Offshore Oil Corporation, France’s Total, Australia’s BHP Billiton, Japan’s Index, and American firms Chevron and ExxonMobil, cited PwC. The geographical variation of the countries vying to get involved show just how significant oil is to the global economy.

 

Several countries’ economies are regarded as petroleum economies based on oil, meaning the majority of their economic success is contingent upon the success of oil. Unlike other countries, which largely finance their governments through taxation, petro-states rely on their oil and gas revenues. To provide an idea of which economies rely most heavily on oil as an export, the World Bank released data showing oil revenue as a share of each countries’ GDP. Saudi Arabia ranked third, after Libya and Kuwait, with roughly 45 percent of its GDP dependent upon oil. In terms of government income, Russia obtains about 50 percent through oil and gas, Nigeria receives a more impressive 60 percent, and Saudi Arabia weighs in at a whopping 90 percent.

 

Countries where fuel accounts for more than 90 percent of total exports include Venezuela, Libya, Sudan, Kuwait, Iraq, Bruni Darussalam, Algeria and Azerbaijan. Therefore, if a demand shift were to occur driving down oil prices, the petroleum-reliant economies would suffer. Additionally, if oil demand were to decrease, the countries that currently import oil would be forced to reallocate money locally. This would benefit individual country economies, but damage the global economy and international trade.

 

Prior to 2014, when oil was selling at approximately $100 per barrel or above, petro-state countries were able to finance lavish government projects and social welfare operations, securing widespread popular support. With oil prices dancing around a $50 per barrel value, petro-state countries find themselves curbing public spending and forced to fend off rising domestic unhappiness and even incipient revolts.

 

At the peak of their glory, the petro-states played a colossal role in world affairs. I 2013, members of OPEC earned an estimated $821 billion from oil exports alone. With the corresponding influx of capital, these countries were able to exercise influence over other countries through a wide variety of aid and patronage operations. For example, The Nation discussed how Venezuela sought to counter U.S. influence in Latin America through its Bolivarian Alliance for the Peoples of Our America, which is a cooperative network of mostly left-leaning governments. Additionally, Saudi Arabia spread its influence throughout the Islamic world by financing efforts of its ultra-conservative Wahhabi clergy to establish madrassas, or religious academies. Under the leadership of Vladimir Putin, Russia used prodigious oil wealth to rebuild and refurbish its military which had largely deteriorated following the collapse of the soviet union.

 

That influential dominance was then, of course, and this is now. While the power of these countries still matter, what currently worries their presidents and prime ministers is the increasing likelihood of civil violence or state collapse. According the The Nation, internal strife and civil disorder are likely in oil-producing states like Algeria and Nigeria, where the potential for growth in terrorist violence during times of chaos is always high.

 

Now that the past and present of oil demand has been established, it is important to consider what is driving the change. Petroleum is used primarily for transportation and has held more than 90 percent of the transportation market for the past 60 years. According to Forbes, to this date, there have been no scalable economic competitors in the transportation space.

 

During the second half of the last decade, however, biofuels made a competitive push in the U.S. as the Renewable Fuel Standard (RFS) mandated increased ethanol in the gasoline supply. This resulted in a one million barrel per day (bpd) global increase in biofuel consumption, which was a scarce drop in the bucket compared to the nearly seven million barrel a day increase in crude oil consumption during that same timeframe. Therefore, despite numerous claims that biofuels would essentially “kill” the crude oil industry, the demand growth for crude oil has been resoundingly consisted, rising by an average of one million bpd for over 30 years.

 

In February of 2016, Bloomberg published an article on electric vehicles (EVs) that made many similar arguments to the biofuel proponents that were being exercised over the last decade. The article, titled, “Another Oil Crash Is Coming, and There May Be No Recovery,” urged oil investors to “start taking electric cars seriously.” One side of the electric car argument is to encourage individuals to buy electric and reduce their overall environmental footprint. The devil’s advocate may argue that encouraging more people to purchase electric cars may drive them away from public transportation, like buses and trains, and may ironically aggravate environmental problems and cause traffic jams.

 

Yet, what would happen if public transportation too moved into the electronic sector? Demand for oil would plummet if the major “gas guzzlers” that enable efficient public transportation relied solely on electricity to run, which would throw off the entire oil-market dominance in the global economy. With areas like China, India, European Countries and even the state of California implementing policy changes to move away from gas-run transportation, this shift may be a more realistic reality than many analysts anticipate.

 

So, where will demand for crude oil go? There are a number of determining factors waiting in the wings, ready for their big moment. Only time will tell which factor will outperform them all.

 

Works Cited

Biscardini, Giorgio. “2017 Oil and Gas Trends.” Strategy&, PwC, www.strategyand.pwc.com/trend/2017-oil-and-gas-trends.

 

Heakal, Reem. “What Is International Trade?” Investopedia, Investopedia, 19 Apr. 2017, www.investopedia.com/articles/03/112503.asp.

 

Hayes, CFA Adam. “Economics Basics: Supply and Demand.”Investopedia, Investopedia, 20 Apr. 2017, www.investopedia.com/university/economics/economics3.asp.

 

Hutt, Rosamund. “Which Economies Are Most Heavily Reliant on Oil?”World Economic Forum, www.weforum.org/agenda/2016/05/which-economies-are-most-reliant-on-oil/.

 

Klare, Michael T. “As the Oil Industry Collapses, What Will Happen to the Countries That Depend On It?” The Nation, 22 June 2016, www.thenation.com/article/as-the-oil-industry-collapses-what-will-happen-to-the-countries-that-depend-on-it/.

 

“Oil Prices and the Global Economy: It’s Complicated.” IMF Blog, 14 Apr. 2017, blogs.imf.org/2016/03/24/oil-prices-and-the-global-economy-its-complicated/.

 

Randall, Tom. “Another Oil Crash Is Coming, and There May Be No Recovery.” Bloomberg.com, Bloomberg, 24 Feb. 2016, www.bloomberg.com/news/articles/2016-02-24/another-oil-crash-is-coming-and-there-may-be-no-recovery.

 

Rapier, Robert. “Is The Electric Vehicle A Crude Oil Killer?” Forbes, Forbes Magazine, 25 Feb. 2016, www.forbes.com/sites/rrapier/2016/02/25/is-the-electric-vehicle-a-crude-oil-killer/2/#ece4db819f90.

 

Rapier, Robert. “Peak Oil Demand Is Millions Of Barrels Away.” Forbes, Forbes Magazine, 19 June 2017, www.forbes.com/sites/rrapier/2017/06/19/peak-oil-demand-is-millions-of-barrels-away/#36d8fe876940.

 

“The Oil Market.” Economics Online, Economics Online, www.economicsonline.co.uk/Competitive_markets/The_market_for_oil.html.

 

“U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” How Much Oil Is Consumed in the United States? – FAQ – U.S. Energy Information Administration (EIA), EIA, www.eia.gov/tools/faqs/faq.php?id=33&t=6.

 

“Why Are Oil and Gas Important?” Why Are Oil and Gas Important?, World Petroleum Council , www.world-petroleum.org/edu/221-why-are-oil-and-gas-important.

 

“Struck Oil!” Oil Prices Are on the Rise, But How Long will the Sunup Last?

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Oil markets are positioned for yet another wild ride; with academic and Wall Street analysts predicting price increases of anywhere ranging from $40 to $70 per barrel by the end of the year, oil is looking far more handsome to investors. Over the last two and a half years, the industry experienced its deepest downturn since the 1990s. As the old saying goes, “history always repeats itself.” When using the past as a guide, after every oil bust comes a significant recovery, if not a market boom. With external factors like increased electronic car production and the Organization of the Petroleum Exporting Countries, known as OPEC, fast at work, one question remains: just how long will this upswing last?

According to macrotrends, as of October 10th, the price of West Texas Intermediate (WTI) crude oil was $49.17 per barrel. “It looks as though the market started to get convinced that the rebalancing is actually happening,” Tamas Varga, an analyst at PVM Oil Associates Ltd. Said in a note during late September of this year.

Even after oil prices recovered from below $30 per barrel in early 2016 to $50 per barrel by the end of that year, The New York Times reported that Executives believe it will be many years before oil returns to a comfortable and prosperous $90 or $100 per barrel, which was essentially the norm for the industry until the price greatly collapsed in late 2014. However, analysts still remain hopeful that oil prices will sit above $60 per barrel by the end of this year.

Following a drumbeat of bullish data in September, which included the International Energy Agency’s upward revision to its demand outlook, crude oil prices were lifted, returning the U.S. to bull-market territory. The Wall Street Journal reported that this serves as the sixth bull market for the crude industry in four years and the first since February of this year.

Investors have gained new confidence that OPEC will continue to cut production and its efforts will help to bring oil’s supply and demand into balance, thus increasing prices. Other factors, like Iraqi Kurdistan’s independence referendum, have played an influential role in boosting prices. After Turkish President, Recep Tayyip Erogan, made a camouflaged threat to close the pipeline which allows for Kurdish oil to reach the global market, crude prices perked up in response.  Political and economic upheaval in major oil-producing countries like Venezuela could cause a major price spike as well.

In the wake of Hurricane Harvey, U.S. oil rebounded as U.S. refineries came back online. Due to the storm’s immense power and widespread devastation, U.S. oil supply became more limited, causing an increase in the prices per barrel.

Global demand for oil has also been strong in recent months. In early September of this year, the International Energy Agency (IEA) raised its prediction for demand growth throughout 2017 and expects an increase of at least 1.6 million barrels each day. Additionally, Forbes reported that the “Energy Information Administration showed that motor gasoline product supplies rose 0.6 percent on a year on year basis.” With the IEA confirming rising growth outside the U.S. and the EIA confirming the rise in U.S. demand for petroleum product, “oil markets will move back into contango, and there is really nothing stopping a move in U.S. crude to $60/barrel.”

Despite outspoken investor confidence in a continued upswing in crude oil prices, some more speculative investors and hedge funds remain bearish when placing bets on U.S. crude oil. Donald Morton, a Senior Vice President on the energy trading desk at the Connecticut-based Investment Bank Herbert J. Sims & Co., told the Wall Street Journal, “The short sellers haven’t capitulated yet. Those bears who are entrenched remain entrenched – they’re not convinced this is over.”

In early 2017, data from the Commodity Futures Trading Commission showed the bullish bets outnumber bearish ones by more than 11 to one, but according to more recent data, that number has shifted to less than three to one.

So, who benefits from this resurgence in oil prices? Oil companies, their employees and shareholders all walk away as winners when oil and gasoline prices rise. U.S. producers are likely to lock in higher prices for future outputs to maximize their profit. Michael Tran, the director of energy strategy at RBC Capital Markets, regarded this producer mentality as something that has previously capped rallies and worked against OPEC’s pricing efforts.

Producing states, including Alaska, Louisiana, North Dakota, Oklahoma and Texas benefit from residual employment and tax revenue increases. The higher crude prices equate to increased activity in the oil fields, which aids local businesses including construction firms that build housing, truck dealerships, and mom-and-pop services companies.

Nigeria, Russia, Saudi Arabia and Venezuela are all major crude oil producing countries that have been pressed financially in recent years.  For the Saudis, higher oil prices hold an additional benefit as its state oil company, Saudi Aramco, becomes more valuable for the initial public offering (IPO) planned to roll out later this year.

Lastly, there is a potential benefit for the environment. With increasing oil and gasoline prices, consumers are encouraged to buy smaller, more fuel-efficient vehicles and limit driving. While this is a good sign for mother nature, consumers of gasoline, heating oil and diesel fuel walk away from the oil pricing increase as losers. Additionally, retail outlets, hotels, and restaurants can take a hit when consumers have less disposable income in response to increased pricing.

With OPEC members producing nearly 40 percent of the global oil supply, the group, when united, serves as a tremendous force in dictating oil prices. In response to their recent efforts, current oil and gasoline prices are more or less in balance, which The New York Times suggests positive economic news for all parties affected by the industry.

As excitement continues to circulate around the direction of oil prices, it seems as though no one has bothered to consider impending potential threats to the crude oil industry.

“It’s going to be huge,” overjoyed oil industry experts exclaimed as Donald J. Trump was elected as the U.S.’ 45th President. Trump is outspoken about his support of industry efforts to build more pipelines, including the Keystone XL, a pipeline that would open up more federal lands and Deepwater prospects for drilling, and successfully deliver Canadian heavy oil to refineries located near the Gulf of Mexico. He has also stated he would like to lower regulatory burdens on the industry, which was made apparent through his lack of sympathy for the international Paris climate accord, which set out to lower global dependence on fossil fuels.

If enacted, all the aforementioned policies would increase natural gas and oil supplies on domestic and international markets, which in theory sounds great, right? Well, this would actually lower gas prices, which would hush the joyous industry expert’s tune.

Trump’s presidency isn’t the only threat facing the oil industry. Automakers have been pushing to produce more electronic cars.

10 years ago, Apple Inc. released a surge of innovation (does the name iPhone ring a bell?) that completely capsized the mobile phone industry. With some assistance from ride-hailing services like Uber and Lyft, and new self-driving technology, Bloomberg Technology stated that Electric cars could be on the cusp of pulling the same fast one on “Big Oil.”

David Eyton, the head of technology at the London-based oil giant BP Plc, stated in an interview, “Electric cars on their own may not add up to much, but when you add in car sharing (and) ride pooling, the numbers can get significantly greater.” Fewer people driving cars indicates less demand for oil. If the already diminishing vehicle numbers on the road are replaced by electronic vehicles, the demand for oil will greatly reduce, causing a huge drop in price and supply will likely continue to increase or stay the same.

Tim Harford, the economist behind a BBC radio series and book on historic innovations that disrupted the economy pointed out that instead of electric motors gradually replacing the current norm of internal combustion engines within the model, there’s likely going to be “some degree of systemic change,” adding, “(improvements in technology) are a lot more complicated (than perceived).”

Moral of the story? Yes, crude oil prices are rising at a promising rate; however, one must always remember that all good things do come to an end.

 

Works Cited

Collins, Jim. “Rising Demand Will Continue To Drive The Rally In Crude Oil Prices.” Forbes, Forbes Magazine, 27 Sept. 2017, www.forbes.com/sites/jimcollins/2017/09/27/rising-demand-will-continue-to-drive-the-rally-in-crude-oil-prices/#2f2a309c2749.

“Commodities: Latest Crude Oil Price & Chart.” NASDAQ.com, www.nasdaq.com/markets/crude-oil.aspx.

Krauss, Clifford. “Oil Prices: What to Make of the Volatility.” The New York Times, The New York Times, 15 May 2017, www.nytimes.com/interactive/2017/business/energy-environment/oil-prices.html?_r=0.

Saefong, Myra P., and Mark DeCambre. “Oil Prices Settle at a More than 1-Week High.” MarketWatch, MarketWatch, 10 Oct. 2017, www.marketwatch.com/story/oil-aims-for-first-2-session-gain-since-late-september-as-saudis-cut-crude-exports-2017-10-10.

Salvaterra, Neanda, and Alison Sider. “Oil Prices Mixed Ahead of Crude Market Data.” The Wall Street Journal, Dow Jones & Company, 9 Oct. 2017, www.wsj.com/articles/oil-prices-yo-yo-ahead-of-crude-market-data-1507546791.

Shankleman, Jess, and Hayley Warren. “How Electric Cars Can Create the Biggest Disruption Since the IPhone.” Bloomberg.com, Bloomberg, 21 Sept. 2017, www.bloomberg.com/news/articles/2017-09-21/how-electric-cars-can-create-the-biggest-disruption-since-iphone?utm_medium=email&utm_source=newsletter&utm_term=170925&utm_campaign=ritholtz.

 

Is Amazon the Retail Apocalypse?

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Do you remember where you were on June 12, 2017? I certainly do; I was riding a very delayed 1 train on the New York City Subway Red Line to the 59th Street stop just two blocks from my office. With the fear of being late to work driving my actions, I omitted my morning coffee from Starbucks and ran to the 9th floor of my building. I was greeted by a too-quiet office in which each one of my co-workers’ eyes were glued to the television screens playing CNBC. The bold chyron stating, “Amazon to Acquire Whole Foods” at the bottom of the screen silenced me faster than I could regain my breath.

 

The implied monopoly of Amazon’s takeover of Whole Foods provides a tremendous threat to brick-and-mortar retailers. Following the announcement that Amazon was buying the mega health food chain, stock prices of top grocery stores all declined. Shares of Kroger, the parent company of Ralphs and Food4Less supermarket chains, were down 14.41% to $21.02. Target and Costco shares fell 9.7% to $50.08 and 6.83% to $167.77 respectively.

 

Meanwhile, thousands of Whole Foods employees began to ponder whether Amazon’s inclination for automation would result in their jobs being replaced by robots.  Amazon’s ability to cause such a resounding effect on the stock market after the announcement of a proposed acquisition, while simultaneously intimidating suppliers and competitors, highlight’s their dominance in the economy.

 

Wall Street Investors are placing large wagers that Amazon and the new fast fashion trend will knock out numerous stores in the next months and years to come.

 

Traditionally, the retail industry has been admonished by the stock market. This assertion is supported by Bespoke Investment Group’s stats on the average percentage of shares that investors are shorting, or essentially betting against. Fortunately for investors and unfortunately for retail companies and employees, this retail short sale has been a winning trade.

 

Insipid sales stemming from low investor confidence has resulted in hundreds of store closures, bankruptcies, and countless layoffs. On average, 15.6% of shares among retailers are being shorted, which, by the Street’s standards, is very high.

 

The investors of Wall Street are not the only demographic to blame, as many Americans favor the ease and hassle-free experience of online shopping as opposed to taking trips to local malls. Meanwhile, the brick-and-mortar stores that have survived are struggling to compete with fast fashion-modeled stores like H&M and Zara. Due to this blatant shift in consumer behavior, Wall Street experts have grown exceptionally bearish when it comes to investing in multiline retailers, including general merchandise chains like Kohls and department stores like Macy’s.

 

The impending apocalypse for the brick-and-mortar stores isn’t here just yet, though. Some retail giants have maintained their dominance in the industry; take Best Buy, for example. Many consumers and investors alike feared the Technology and Electronics chain would be quickly overpowered by Amazon; however, Best Buy’s stock is up 37% and is actually outperforming the online shopping megastore.

A Speculated Economic Silver Lining Brightens the Shadow of a Natural Disaster: How the U.S. Economy could benefit from Hurricane Harvey

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The ruthless storm battering Houston, Texas is said to rank as one of the nation’s costliest disasters, with speculated loss of tens of billions of dollars in economic activity and property damage in an area critical to chemical, energy, and shipping industries.

 

Despite the widespread devastation and predicted losses of up to $100 billion, economists vocalized optimism that the Texas city is likely to recover quickly and may experience economic growth from rebuilding efforts.

 

Historically, the U.S. economy has rebounded following natural disasters, most easily associated with the financial resurgence following the $40 billion loss from Hurricane Katrina in 2005 and the $25 billion loss from Hurricane Ike in 2008. Dan Laufenberg, chief economist at Ameriprise Financial, stated, “the U.S. economy rebounded from Katrina, although the region hit by the storm has not, demonstrating once again how amazingly resilient our economy can be.”

 

The Houston metropolitan area, the U.S.’s fifth largest based on population, accounts for approximately 3 percent of the nation’s gross domestic product (GDP). Texas is often attributed as a center for oil production and refined products like diesel fuel, gasoline, heating oil, and other distillates.

 

In anticipation of increased demand due to the hurricane, wholesale trading prices for gasoline increased 6 cents to $1.75 per gallon on the benchmark contract set to settle next month. Ellen Zentner, chief United States economist at Morgan Stanley, suggested the lagged effects of rebuilding homes and replacing motor vehicles will outlast the anticipated neutral impact on national gross domestic product in the third quarter, providing a lift to GDP in the fourth quarter and beyond.