The recent plunge in oil prices can be a benefit to some and a curse to others. But how will it impact personal investors?

Oil is one of the most fundamental and dominant commodities in the global economy. The variety of its uses – from fuel and lubricants, to plastics and cosmetics – means that it has a strong influence in the fortunes of almost every business and economy in the world. 

So when there is a major movement in the price of crude oil there are bound to be ripples felt across the globe, from the economies of major nations, down to the consumer and personal investors.

As the recent tumble in oil prices continues to reverberate around the world, predicting the outcomes can be a complex challenge. It’s a loss for some and a bonanza for others, but predicting who will win and lose is not always straightforward. Here’s a simple guide that unravels some of the complexity.

A global game of chess

The massive importance of oil in the world economic merry-go-round cannot be overstated. It has a huge effect on world politics and power struggles and can even be the underlying cause of international conflicts. It’s a high-stakes game.

The most fundamental cause of price fluctuations is simply supply and demand. If supply goes up, prices go down and vice versa. History tells us, however, that supply is not simply a function of how much is available and how efficiently it can be extracted and marketed. It is often boosted by big oil producing countries in order to price out higher-cost producers so they can retain control of world markets.

The large Middle Eastern oil producers are generally rich enough to be able to flood the market with over-production in order to temporarily force prices down and put pressure on other oil producing countries who are much less able to absorb price drops. In this way they can maintain their dominance over the long term.

The current low price environment is really hurting countries such as Russia. Oil is a major part of their export economy and they are currently in recession, so they are at the mercy of the market with little room to maneuvre.

On the other side of the coin, those economies that are net importers of oil and who have growing industries that use oil as one of their major industrial inputs are benefitting substantially from lower oil prices. This includes nations in the developing world, such as Latin America, Africa, and Asia, but it can also help established diverse economies, such as, the United States and to some extent Australia.

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Major oil producing nations will increase production to maintain their dominance 

A bowser boost to economic growth

As consumers, the oil price drop certainly gives us a warm feeling every time we fill the tank. This positive impact on household budgets has a flow-on effect that can be positive for economic growth. In simple terms, it gives us some extra disposable income to go out and enjoy a restaurant meal, go on a holiday or buy a new TV, so the warm feeling we get at the bowser also stimulates many parts of the economy.

What are the impacts on stock markets?

The impacts of an oil price slump are a lot more erratic when it comes to share markets. The most obvious losers in the short term are the oil producing companies whose profits are directly affected. At the other extreme, transport companies and airlines such as Qantas experience lower input costs, while other sectors, such as manufacturing and services, will benefit from lower production costs and increased consumer demand.

As with any share market analysis, it is important not to treat things too simplistically. The fundamental strengths of companies are often a lot more important to their long-term performance than the short-term impacts of the price of one commodity, so avoid knee-jerk reactions when looking at your personal investment portfolio.

The long-term prospects of the giant oil companies are unlikely to be endangered too much by a transitory drop in oil prices. It’s equally important to remember that share markets are constantly influenced by a host of factors. These are sometimes based on facts and at other times it is based on sentiment and perceptions. So focusing on just one element in the equation can be fraught with danger.

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Now is the time for motorists to fill up (Photo: Mike Mozart)

Quality research is your best ally

While issues such as oil price fluctuations can tend to grab the financial headlines, it is vital for personal investors to resist making snap decisions and thereby miss an opportunity to make investment decisions based instead on a broader, longer-term view.

This is where the research resources available through a financial planner can be valuable. Getting ‘the good oil’ from a professional financial planner can make all the difference to your financial growth and security.

What do you think of the recent oil price gymnastics? Share your thoughts below.