You’ve probably been watching the price of oil drop. In turn, you’ve watched the health of the stock market reflect these fluctuations as investors worry about the state of the economy.
At our private SaaS company, we use the stock market as a health-barometer for our own company’s valuation. The public markets help us understand valuations for companies similar to ours (those in project management software and/or other SaaS companies). So we look to these publicly traded SaaS companies as a barometer for our valuation.
What’s oil got to do with it?
That wasn’t always the case, however.
In the past, cheap oil was great for U.S. companies. The United States is a net importer of oil, which means we mostly consume rather than produce oil. Getting a low price on oil has therefore been great. Historically, a low oil price did not tend to affect the U.S. stock market by bringing it down dramatically.
So what changed?
High oil prices have driven exploration
When oil prices soared to over $100 a barrel, it became worthwhile for U.S. companies to explore how the United States could produce more of it. Oil was suddenly very economically attractive to produce at home.
When oil prices soared to $100 a barrel, it became worthwhile to explore how we could produce more of it. — Michael Lin, Mavenlink CFO
To get started, these companies borrowed heavily to invest money in science, equipment, labor, and more. We fracked in Oklahoma, drilled in the Gulf of Mexico, and figured out how to use high-temperature water to extract oil from the oil sands of North Dakota. Millions of dollars entered the economy instantly, as we purchased rigs, equipment, performed research, and more. We experienced an economic boom. Then, as happens in the world of ebb and flow, oil prices plummeted.
Falling oil prices contracted the U.S. economy
Barrel prices went down to under $30 a barrel, a far cry from the $100+ that made it worth our time to explore production. Companies in these businesses began scaling back. They spent less on capital expenditures, and there was additional fear that they may default on their loans.
As a result, there was an economic shakeout.
There was fear that the U.S. economy could enter into a recession.
Today, we see the effect across industries.
What the price of oil means for our economy and our SaaS company
If we save a dollar a gallon, that’s $15 billion in Californians’ pockets. — Michael Lin, Mavenlink CFO
First, I’m optimistic. The United States is still a net importer. Cheap oil is good for us in the long run. Lower prices at the pump mean your family and mine have more discretionary income. In California alone, we consume ~15 billion gallons of gasoline per year. If we save a dollar a gallon, that’s $15 billion in Californians’ pockets.
We may save that or spend it. Certainly most of us won’t go out and buy million-dollar oil rigs. So we will stimulate the economy, but our collective economic impact won’t be as sudden and dramatic as oil exploration. It will be slow, steady, and stable.
I’m okay with that. Right now, as I stated, the price of oil is a driver of public companies’ valuations, which influences how I assess our private company’s valuation. At the same time, more money in the pockets of our country means more people will use products like the project management software Mavenlink provides. It’s an interesting phenomenon.
For me, I try to understand what I can. Each morning, I look at the oil prices. You would think the CFO of a SaaS company wouldn’t care what the price of oil is.
Yet hopefully I’ve shown why they would.