Fisher Investments Editorial Staff
Commodities, Media Hype/Myths

Oil Oozing Up

By, 12/21/2010

Story Highlights:

  • Oil is making headlines once more, with some declaring it a threat to the economic recovery.
  • But oil price increases are demand-driven—as the economy recovers, demand increases, as well as oil prices.
  • Higher oil prices in a recovering economy are normal and shouldn't be fretted. 


Don't look now, but oil is oozing back into headlines. Fortunately, recent oil stories have nothing to do with top kills or junk shots, but some investors find them just as ominous. Today, some folks are fretting higher oil prices could be "another item [in] the list of threats to the economic recovery." But this is putting the cart before the horse.

Oil is traded in relatively free markets (save some influence from OPEC and other oil producers), so oil prices are determined by, yep, supply and demand. Oil supply is determined by the amount of excess existing capacity—mostly controlled by OPEC countries—and new oil finds. But even OPEC doesn't have unlimited capacity to adjust oil supply, and new finds can take many years to bring online. So unless something disrupts oil's flow, demand has a big influence on prices.

Generally speaking, economic growth drives oil demand. When the global economy is growing nicely, demand picks up. When the global economy stalls (e.g., from mid-2008 through mid-2009), so does oil demand. The recent rise in oil prices is no exception. An improving global economy results in increased oil demand and higher oil prices. But don't higher oil prices stoke inflation and mean there's less money to be spent elsewhere? That's true to some degree, but fact is our economy is much less energy intensive than it was decades ago. Today, we need much less oil per dollar of output, so higher oil prices have much less economic impact than they used to. And our guess is that, over time, global economies become still less energy intensive, not the reverse.

But that doesn't mean big oil price spikes can't surprise and have negative repercussions. Oil skyrocketing to $300 per barrel tomorrow could be pretty bad because the economy wouldn't have time to adjust—but gradually rising oil prices are more easily absorbed.  That doesn't mean higher oil prices affect all industries evenly—some will feel it more than others. However, as recent benign inflation data has shown, rising oil doesn't necessarily translate into overall rising prices.

Recent higher oil prices are a normal consequence of a growing global economy. Higher prices for other economically sensitive commodities similarly reflect strong demand resulting from a growing global economy. These are conditions investors should embrace, not fear.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

Click here to rate this article:

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


Get a weekly roundup of our market insights.Sign up for the MarketMinder email newsletter. Learn more.