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Oiling the wheels
THERE has been much in the press over recent weeks about the historically high price of oil.
There seems to be a great deal of fuss and stockmarkets have gone down as a result. What is it all about and how can the price of a thick black liquid realistically make a difference to the value of your investments and pension plans? Are you confident that your investment adviser knows why the oil price has caused markets to go down recently? This topical subject is explored further in some of the questions below:
Q It is obvious to me that a high oil price means a higher petrol price but why would it depress the value of my investments by upsetting the stockmarket?
A It is often too easy to see those in the media as doomsayers ready to jump onto the next sensational piece of news. At times it can feel as though the reporters and even the investment managers are clutching at straws, making excuses to explain away those upsetting declines in our investments. However, to be fair to those who commentate on stockmarkets, they really do have a valid point here. The effect at the petrol pump is annoying enough but it really could be the tip of the iceberg. In effect, if the oil price rises and stays at such historically high levels then it can cause a significant and negative chain reaction worldwide and it really could affect every one of us in so many ways.
Put in the simplest terms, many industries are big consumers of oil. If their costs rise then they are likely to pass this pain on to us by charging higher prices for their products and services. Rising prices mean increased inflation and this can lead to sharply rising interest rates. This increases our mortgage payments and makes us less inclined to spend. Businesses, which together form the economy, can suffer as a result. The stockmarket is essentially made up of individual businesses and our investments are only likely to rise if there is belief in a future buoyant economy. Equally, poor economic prospects will generally cause markets to fall.
This is seriously oversimplified but hopefully it provides a rough thumbnail sketch of what can drive the stockmarket, and therefore your investments.
Q Why did the oil price rise to such historic highs?
A The blame for the recent surge in oil prices may be laid principally at the feet of those who govern Iraq. The country's oil production capacity has not come on stream as quickly as was anticipated and as we all know there has been a less than smooth transition following the end of the war over a year ago. The constant threat of sabotage is a serious constraint to the rebuilding of the industry. If you bear in mind that Iraq has the second-largest oil reserves in the world after Saudi Arabia then you can appreciate the potential impact on the oil price that further delays in reconstruction could have.
Q I understand why stockmarkets and the financial media seem somewhat concerned now about the oil price. Should I be worried about investing for the longer term?
A The fears expressed in the news were based on oil prices staying at those historically high levels or even increasing over a long period. OPEC (the Organisation of Petroleum Exporting Countries) has an enormous influence on the future of oil prices because it essentially controls how much oil is pumped out of the ground worldwide. Pump too much and there will be so much oil available that no one needs to pay high prices. Pump too little and the price is forced higher by the natural market force of demand outstripping supply. OPEC, in order to satisfy its member countries, has to maintain that fine line that ensures that they can sell enough oil at a high enough price. There is little evidence that there is any appetite for a sustained high oil price and I would not advise you to let this latest price movement influence your longer term investment decisions.
Q I'm not really concerned about any short-term stockmarket weakness caused by issues such as a higher oil price. I know that petrol might go up but are there any other ways that expensive oil could affect me more immediately?
A One industry that suffers directly from a rising oil price is the travel business. Simply, if the cost of aviation fuel increases then at some point this has to feed through to the traveller. The low-cost airlines are suffering at the moment and as they fight for a market share they will be less inclined to pass on the extra cost of fuel to you and me. However, there is only so much pain they can take and if the oil price were to return to and stay at its recent high levels then the price of air travel would increase. The effect on the travel industry is compounded by the insecurity felt by many potential travellers owing to the threat posed by terrorism.
So, in summary, market commentators and investment managers have not been misleading you in focusing on the oil price in recent weeks. They have merely brought your attention to an issue, that if sustained, could have more of an impact than you might have thought.
Stockmarkets and, therefore, your investments and pensions, are affected very much by such matters and will react accordingly. However, I would always encourage you to ask your adviser why they think certain world issues affect stockmarkets, just to reassure yourself that they do really know what they are talking about!
This article updated: 22/06/04
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| ......Daily Ditons...... |
Ciel gavelé et fil'ye fardée sont des (ou deux) bieautés bein vite pâssées.
A mackerel sky is never long dry.
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