May 21, 2018
 
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John R. Deitrick, CFP®

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Crude Sense or Crude Nonsense?
  • In the past, rising oil prices typically had an adverse effect on the economy as consumers and corporations reined in spending to cover the increased cost of fuel. However, the recent steady rise in oil prices is not having the same impact on U.S. and global economies as it has in the past.
  • The U.S. economy's overall sensitivity to oil prices has evolved as the United States has developed to become the world's second-largest oil producer.
  • Charles Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, said: "The doubling of U.S. oil production over the past decade means U.S. energy businesses stand to benefit from higher oil prices, and the tax cut in the U.S. is helping offset the higher prices at the pump for U.S. consumers."
Why are oil prices rising?

The price of U.S. oil, as measured by the WTI Crude benchmark, rose above $70 for the first time since 2014 in May. The European benchmark, Brent Crude, rose above $75 per barrel. These higher prices are largely the result of a drawdown in oil reserves, meaning there is less oil in storage, according to the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC). In addition, geopolitical factors such as heightened tensions in Syria, unrest in Venezuelan oil fields and the most recent decision by President Trump to exit the Iran nuclear deal, have all sent oil prices soaring higher.


Are rising oil prices good or bad for the economy?



The shift stems from the rise of the United States as a competitive global oil producer. In January 2018, the International Energy Agency announced that the United States is set to overtake Saudi Arabia as the world's second-largest oil producer. U.S. oil production has surged from a low of fewer than 5 million barrels a day in 2005 to a new record of 10 million barrels per day in 2018.


The increase in U.S. oil production has caused a sharp decline in imports, which have fallen by 42% in real dollars since 2005, while exports are up 318%, according to Steve Leisman at CNBC . This shift in the landscape has enabled greater investment and spending by U.S. oil producers, helping to make up for some of the pain that consumers typically feel from rising prices at the gas pump.


 
Bottom Line

The U.S. economy's overall sensitivity to oil prices has evolved. Historically, higher oil prices have been beneficial to oil-producing regions outside the U.S. The recent energy renaissance within the United States will allow for more of that money to stay within American borders, thus providing a potential benefit to the economy. Still, if oil prices continue to rise at the current pace, it could eventually impact the bottom line for consumers, resulting in higher inflation and ultimately slower economic growth. But for now, as Kleintop states, "most economists would rather see oil prices climbing over $70 than dropping back down to $30."


This material is for informational purposes only and sets forth the views and opinions of our investment managers as of this date. The comments, opinions and estimates are based on or derived from publicly available information from sources that we believe to be reliable. This commentary is not intended as investment advice or an investment recommendation nor should it be construed as a solicitation to buy or sell securities. All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Past performance is no indication of future performance. The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

This Thought of The Week has been prepared by and for Global Financial Private Capital, LLC ("GFPC"). GFPC owns all copyright rights in and to this and each of its Thought For The Week articles. It is impermissible to copy or redistribute GFPC's Thought For The Week articles without our prior approval.

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Investment advisory services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. SEC registration does not imply any level of skill or training. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 
 
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John R. Deitrick  CFP®
Advanced Retirement Design LLC.
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Suite 150
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Office: 614.602.6506
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Email: jdeitrick@advancedretirementdesign.com
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