Oil prices have been looking more and more like a roller coaster the past two years. It brings up inevitable questions for the savvy investor.
How will this impact my portfolio? What does it mean for the economy? What does the future hold for oil?
The good news is that you don’t have to be a true expert to understand the future of oil and how it will impact you. Answering three simple questions will be enough for you to continue to invest with confidence.
What Controls Oil Prices?
There are a few major forces impacting oil prices right now. The biggest is domestic production.
The rise of fracking has enabled the U.S. to produce far more oil than ever before, and the country is now the third largest producer of crude in the world.
This huge increase in supply, from a source that has dramatically lower shipping and import costs, has dropped the price of oil products in the U.S. by more than half since 2014. You’ve likely noticed the corresponding dip in gas prices.
The second major contributor to crude sales is global production. Since the annexation of Crimea, Russia has seen harsh sanctions from a number of its largest trade partners. This has indirectly slowed oil sales in the country through general economic slowdowns.
On the other side of things, steadily increasing turmoil in the Middle East has significantly hurt production over the last two years. When the factors combine, you have a huge swing in the U.S., where more and more of its oil is coming from domestic suppliers, and the reduced import costs further save consumers money.
How Does This Play Into the Economy?
What does this really mean for you? Well, before fracking turned the U.S. into an oil producing nation, lower oil prices were almost universally a boon for the entire economy.
Now, the picture is a bit more complicated. With the prices so low, the domestic oil industry has seen large scale layoffs and huge profit losses. This has reduced the money circulating and being invested from a major source of domestic revenue, and the results have certainly slowed our economic recovery.
On the other hand, we have seen economic growth in the face of the struggling oil industry, and that is good news for investors. Lower oil prices do mean lower overhead for any industry that isn’t directly tied to oil production and sales. With the U.S. economy being so diverse, these savings mitigate much of the nationwide losses seen in the oil sector.
The many other things going on right alongside these savings have seen unemployment hit unbelievable lows while wages continue to rise at a healthy pace. This has allowed the economy to absorb the losses of the oil industry and continue to grow. More importantly, the growth seems to be accelerating.
What Does the Future of Oil Look Like?
Putting all of that together, a continued decline in oil prices would likely slow growth more than anything, so at this point reasonable increases in crude would help the U.S. overall.
Market predictions suggest that prices will go up slowly, but they will remain positive. Summer always sees an increase in demand, and prices match that, so a small dip is expected in September, but oil is expected to finish the year a little higher than it started.
The trend will continue, and prices should break the $50 per barrel margin in 2017. From there a slow and steady rise is expected to hit an average of $57 per barrel in 2020.
Keep in mind that these expectations are long-term averages. Daily fluctuations will be much larger and more frequent, so if you want to include oil prices in your investment calculations, you have to avoid knee jerk responses and play the long game.
The final piece of the puzzle is the next election. Major minimum wage hikes are a major point of discussion, and if passed, they will be large enough to accelerate inflation on a level never before seen.
This will certainly affect oil prices as well as everything else in the country, but the major take away is that current estimations will be off by as much as 15 percent, depending on how rapidly wage changes are implemented.
Regards,
Ethan Warrick
Editor
Wealth Authority
