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 How
Oil Prices Influence
the Economy
When crude oil prices drive gasoline prices higher, consumers may feel the pinch
at the pump and notice the impact of rising oil prices on their investments.
Many businesses around the country may be affected — from companies that
make oil-based products to the airline industry.
According to a Federal Reserve Bank of Dallas study, nine of the 10 U.S.
recessions since World War II were preceded by spikes in oil prices. But because
of lessons from the oil price spikes and energy shortages of the 1970s, 80s, and
90s, the ripple effect of higher oil prices on today's U.S. economy is not as
great. Nowadays, the economy generates more of its gross domestic product from
the service sector, which is less dependent on energy sources than the
manufacturing industry.¹
However, certain industries that rely on low energy costs to fuel profits, such
as transportation and manufacturing, may feel the impact. When energy prices
rise, higher consumer prices could follow.
Increased oil prices also can influence the financial markets. Higher prices
increase manufacturing, transportation, and other costs, which can affect not
only a company's bottom line but consumer spending as well. Increased energy
costs for gasoline and heating usually translate into less money that consumers
have to spend on cars, vacations, or dining out.
Fortunately, energy costs account for only a small percentage of a company's
budget, so higher oil prices may not slow economic growth. Some experts contend
that economic growth is far less vulnerable to price changes than in the past.
They also point to lower interest rates that spurred mortgage refinancing and
federal income tax cuts as mechanisms that reduced the impact of higher oil
prices.²
In fact, higher oil prices can be a boon to investors. Oil and oil-service
companies, alternative-source energy companies, and the multitude of companies
that support these industries may see significant gains and may be suitable
defensive investment opportunities.³
Though consumers may feel lighter in the wallet as a result of higher pump
prices, the pinch they feel on their portfolios because of these increases may
not be as pronounced. Please call if you would like to discuss how economic
trends can influence your portfolio.
1)
CNN/Money, November 17, 2003; "Business Cycles: The Role of Energy
Prices," Federal Reserve Bank of Dallas, 2003
2) Los Angeles Times, March 18, 2004
3) The Wall Street Journal, March 21, 2004
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