December 17th, 2015 01:00 PM
If you have any interest in the value of your investments, then you should definitely care about the price of oil.
Oil is down again only one day after the first federal interest rate hike in 9 years while supply continues to grow with no end in sight. West Texas International dropped below $35 per barrel today and many Wall Street hot shots believe it is headed for the $20’s.
The problem is, many times the price of oil drops, it also brings down investments as a whole. The DOW is down over triple digits half way through the day after a so called “dovish” report from the Fed and a 0.25% interest rate hike. The market shot up yesterday and saw nice gains, but it couldn’t hold up against the declining energy industry which brought worry right back to Wall Street.
We love the cheap gas prices, but often we don’t think of the other consequences when it comes to cheap energy prices. We have talked about many including:
- Energy Sector Job Losses.
- Major producers of more expensive oil will see drop in currency prices which causes more global tension. (Russia, Venezuela)
- Countries that produce the oil for cheap (Saudi Arabia) hold all the cards and a lot of power and influence over many world economies.
- Future energy projects of all kinds get canceled or put on hold. Who wants a technologically inferior and expensive solar panel when energy prices are so cheap? Natural Gas has been declining too as you know. But since the weather isn’t cold enough yet, guess what is happening to the price of natural gas? It’s going down too.
- The price of energy stocks in one’s 401K are likely to fall.
On the other hand, when the opposite happens and oil prices start rising:
- Energy Sector Starts Hiring
- Major producers of oil see profits and reduce global tensions.
- Cheap oil producing countries are more inclined to leave prices high as long as their competition isn’t growing and they are seeing good profits.
- Future energy projects are put into place. People start looking to invest in solar panels and electric cars to reduce their energy bills while oil companies with surging profits start looking for new land and start investing in research, and cheaper technology. Demand and prices for energy like natural gas increases especially in the winter.
- The price of energy stocks in a 401K are likely to increase.
It all comes down to supply and demand.
We must remember that there is always a positive and a negative to everything. If you don’t have many investments but you drive 45 minutes to work, you love the cheap oil. If you are heavily invested in saving for your retirement and take a big hit in your energy investments, you hate it.
This is going to be a problem that must work itself out. Some economists feel optimistic that oil prices could rebound next year but many others say we won’t see any real rebound in oil until the worlds excess oil supply dries up. So until Saudi Arabia says “were cutting back”, it looks like these economists could just be tooting their own horn.