Is there a silver lining to the plummeting price of oil?

Falling oil price cheaper boost economic growth
Falling oil prices are welcomed news for many businesses and consumers.

It is no secret that the oil price is in trouble at the moment, with the price of crude falling below US$60 a barrel.

That is certainly bad news if you are an OPEC cartel country as the income from one of your major exports falls sharply and there is little you can do about it.

With Iranian sanctions failing to bite and US shale producers switching on their production, there is not too much that can be done by the oil supplying countries other than to try to convince their cartel members to slash production.

That is not so easy to do in the era when non-cartel producers such as the US can flood markets with oil.

Lower oil price a boon for oil importing countries

However, the low oil price is an absolute boom for the big oil importing countries and for consumer activity more generally because it reduces the prices of almost everything that is transported.

Indeed, Fundstrat Global Advisers’ Thomas Lee has tipped a ten per cent rise in US share market indices in the remainder of 2018, partly due to an oversold position after a bad month in October but also because of the fall in the oil price, which he described as “$182 billion of household stimulus.”

His suggestion of investing in sectors that have fallen the most such as energy, industrials and materials is already yielding results.

In Australia, we have seen stocks of large oil consumers such as Qantas (ASX: QAN) boom on the prospects of much higher profits.

Consumers and companies big winners

It is not just the US that could benefit from lower oil prices.

Much of the developing world is set to benefit from cheaper oil, particularly countries such as India.

Europe and Japan are also big beneficiaries of cheaper oil.

Crude oil price plunge November 2018
Crude oil price over the past year.

Anatole Kaletsky, the founder and chief economist of Gavekal Research, has tipped that Asia and other countries outside the US will be the biggest beneficiaries from cheaper oil.

Tipping that oil prices will remain muted in the range of US$60 to US$80, he told Bloomberg that companies and consumers will be the big winners from cheaper oil.

Is oil price peak behind us?

Speaking at The University Club of New York, Mr Kaletsky said that: “It’s pretty convincing that oil has reached a peak.”

He said that valuations in Asia and emerging markets had been so low because they were expecting a major setback in China and were also neglecting the chance for cheaper oil.

While admitting that US company profits had also probably hit a peak, he thinks the market has discounted the chance of profits remaining near that high water mark for several years to come.

A self-confessed “permabull’’, Mr Kaletsky thinks there is no chance of a US recession in the next couple of years and like many share market investors, he sees the US Federal Reserve as the main risk of upsetting the share market.

If economic news is “too good’’, he is worried that the Fed might need to hike interest rates further, steepening the yield curve and forcing money out of stocks and into cash and bonds.

To give some idea of how stimulatory lower oil prices are, it has been estimated that in the US alone, consumers will save US$40 billion directly if the current lower prices are maintained.

With booming consumer confidence, much of that money will be redirected to consumption on goods and services, overcoming some of the effects of higher interest rates.

If indirect lower prices for goods and services are factored in, that represents a further US$182 billion in savings for companies and consumers.

Will cheaper oil prices last?

If these sort of stimulatory amounts are then extrapolated across a range of large oil-importing economies, it is clear that cheaper oil will be a major shot in the arm for many companies and consumers.

All of which begs the question, is the 25 per cent fall in the price of oil in just six weeks a temporary factor or should it be baked into forward projections?

That is the multi-billion dollar question but if analysts like Mr Kaletsky and Mr Lee are right, then cheaper oil is about to recharge a broad range of economies, companies and households.

It could also help to revive interest in share markets after some bruising falls in October.

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