NEW YORK (Real Money) -- When are oil prices too low, too low at least to keep helping the stock market go higher? That's what today's session seems to be all about: worries that something could be lurking that could really clobber us.
So let's talk about the downside of a possible oil bust, a bust that's caused by excessive supply, chiefly by the U.S. and less-than-robust demand, centered mostly on slowing growth in China and weakness in Europe.
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First, in the U.S., while there are 34 states that are takers of energy vs. 16 that are makers of energy, we know there are ramifications beyond just simple production. Today, for example, the rails, important market leaders, have been clobbered because many investors figure that we are witnessing the end of marginal oil being shipped by rail. No matter that oil represents 3% of the cargo for the rails or that in some way, fracking sand is a bigger ticket. We know that rails are factoring in continued higher sales for oil and those sales may not come about. Remember, the only places that use rails are where there's no pipe. It's more expensive to ship by rail, so that means oil companies are more likely to drill near pipelines than rails because the marginal cost might be too high. So the worry is real and the stocks were soaring.
We also have industrials that have plunged big into oil, notably General Electric (GE) , which has been noticeably acquisitive in the patch. That was a huge positive four months ago. Today, it's regarded as a negative. JPMorgan Chase (JPM) went from hold to sell. Dover (DE) is a terrific conglomerate that has a very visible oil-drilling component business that's been an asset. Now it is a liability.
Then there are the credit worries. I don't want to finger any one company because we don't know how they are hedged and we don't want to cause any sort of panic, but there are stocks down 30%, 40%, 50% in a matter of weeks and that's not because they are oil and gas companies. It's because they have borrowed a lot of money to drill. That could cause real issues if the price doesn't go up.
Another group of companies are improperly hedged. Harold Hamm, the man behind Continental Resources (CLR) , one of the most successful American oil companies in history, infamously called an $85 shot, meaning he had thought oil was done going down, and took off his hedges. The stock's been cut in half in about two months' time because of that judgment.
Now, I think that the savings to the consumer far outweigh the negatives to the oil producers and the hundreds of thousands of workers levered to them. The equivalent of a tax cut for 317 million Americans is going to more than make up for even major defaults among minor, overstretched players. Don't forget the ripple effects on industry: Gasoline is a huge toll on any company that needs to get its goods to market. That means numbers go higher for gobs of companies. Until today restaurants and retailers were soaring. They went up too much in advance, but they are real winners longer term. There are too many domestic beneficiaries to count.
Given that the costs for drilling are so low, though, it won't be catastrophic for the vast majority of domestic oil companies, as even mid-$60 pricing represents big profits for most of the independents, particularly those drilling in the Permian or Eagle Ford where there are almost no dry holes.
In fact, the oil futures market allows these producers to lock in prices as high as $75 to $80 out several years, which means if you are drilling at $40 a barrel -- the average cost for an efficient, modern oil company with great prospects -- you are booking great gains. Plus, these companies are flush, and if they believe that oil is going to stabilize they can buy any of these minor players at well beneath their net asset values and use their excellent balance sheets to refinance high-cost debt.
What I am far more concerned about is some sort of ripple effect from overseas that we aren't thinking about. If major Russian banks go under because that country is so oil dependent, I don't think it is possible we will go unscathed even as evasive action is been taken by most U.S. banks. It doesn't matter; if the collapse of Cyprus could hit our banks, the collapse of Russia could too, even as we are much more insulated and in better shape than the 1998 Russian contagion that washed up here. Now you know I will simply say: "What does the collapse of Russia have to do with the price-to-earnings ratio of Bristol-Myers (BMY) ?" And the answer is: absolutely nothing. But you don't utter that bit of wisdom until Bristol-Myers is hit by Russian fears. That sure hasn't happened yet.
I don't think a collapse of Nigeria, another country heavily dependent on oil exports for its budget, would have much of an impact on us. On the other hand, a revolution in oil-dependent Venezuela would most likely have a positive impact given that so many of our packaged goods companies do business there and have taken a real beating.
So yes, a contagion from an OPEC producing country could produce a shock. A major drop-off in drilling for Mexico and Canada could be stressful, but it's strictly bend slightly and not break at all from what I can tell.
Here's what I think could be a bigger problem. It's visible on your screen today in the selloff in many highflying tech stocks that had, apparently, been bid up big at the end of last month, perhaps to create some inflated, artificial gains -- namely, that the world is slowing pretty dramatically and oil's the symptom that it's getting worse, not better.
In other words, in this instance, oil is joining copper and iron as tells that China's growth is stagnating and Europe's getting worse. Industrials and tech companies that need those faltering markets to turn around are getting hammered today. That's because if commodities are that weak, there are real structural issues that could breed crises down the road. I can't defeat that analysis as I think that Europe's in sad shape and China seems hapless right now, despite our image of that country's super-human reputation.
Again, though, I don't want to get too negative about this spill over. Here's why. If you notice, the early morning S&P 500 futures often reflect European weakness. But then our market lifts after a bit of opening selling related to those futures. Why does it lift? Because the selling in Europe's about redeploying capital here. They sell their weakness, particularly their currency's weakness regardless of the stocks they are associated with, and they buy our dollar's strength both with bonds and stocks. Remember, their weakness is our strength.
So I am cognizant that we got too excited about all the industries that could be direct beneficiaries of plummeting gasoline prices and the energizing impact on the consumer. However, I like those stocks on precisely this kind of a pullback. I get that there are a lot of companies that need a stronger Europe and China to thrive, particularly tech companies, and oil can be both a thermometer of weakness and an actual cause of a decline, as in the case of Russia and several other producing nations.
In the end, though, the money flows here, and therefore, any decline is buyable, especially if you are picking up shares of companies that aren't that economically sensitive. Those are companies with good U.S. businesses such as health care and biotech, or one-for-one beneficiaries of lower gasoline prices in travel and leisure that I would buy into any weakness. Call me a skeptic, but don't call me a pessimist. There's too much good that happens with energy prices going lower, and I believe the downside to be both ephemeral and manageable, if not buyable, between now and year-end.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.
Editor's Note: This article was originally published at 4:01 p.m. EST on Real Money on Dec. 1.