Depending who you ask about oil, you currently get one of two answers. Either mounting Middle Eastern tensions will soon send prices surging — wreaking havoc on the world economy. Or faltering global economic growth will crater oil prices. Either way, pundits posit that the global economy — and stocks — will suffer. No.
Oil prices may swing, but investors should expect little economic fallout. Here’s why I think oil has lost its famed economic power of yesteryear.
Wild oil price swings over the past 12 months caused confusion. Between mid-August and early October last year, Brent crude oil prices jumped 25.9 per cent as folks feared the US president Donald Trump’s Iran sanctions would squeeze supply. Pundits projected prices would keep climbing. Instead, they plunged -41.2 per cent through year-end, as the global stock market correction in the fourth quarter stoked recession and demand fears.
Big fluctuations continued in 2019. First, prices rebounded dramatically — surging 48.2 per cent by April 25, with many blaming rising tensions between America and Iran. Then prices plunged 20 per cent, with headlines blaming slower global oil demand growth and weak manufacturing data, presaging potential.
The wild wiggles mislead. Yes, absolutely, If sanctions and tensions squelched supply, costs would jump. Oil trails only natural gas in supplying UK energy — 43 per cent of annual consumption. Despite recently rising UK North Sea output, Britain is still a net oil importer. Even though it gets very little oil from Gulf exporters, prices are set globally. If Tehran successfully closed the Strait of Hormuz, prices would rise — for Britain, Europe and everyone. Like stocks, sentiment can sway oil prices heavily in the short term.
But pundits fearing oil calamity miss some critical factors. Supply circumstances evolved from the past. For one, Iran can’t shut the 22-mile wide Strait unilaterally, rendering comparisons to 1973’s Arab oil embargo inaccurate. These days, Western navies are watching. Look no further than last month, when HMS Montrose rebuffed Iranian efforts to halt a British tanker.
Then, consider the 1980-8 Iran-Iraq war, which included more than 200 attacks on tankers. This “Tanker War” hit only about 2 per cent of total Gulf traffic and oil prices didn’t spike. Supply growth elsewhere offset the tiny impact easily.
Fast forward to today, and supply is growing faster. Back then, it was the North Sea with old technology. Now it’s US shale oil production with radical new technology.
According to BP’s annual oil data, US production surged 2.2m barrels per day last year — an unprecedented single-country output jump, almost as much as all Iranian output. America’s Energy Information Administration (EIA) projects 2019 oil output rising by another 1.4m barrels per day. US producers keep boosting efficiency, thus maintaining profitability despite seemingly ever lower prices.
Demand for oil has also evolved. Even if the oil price spikes, it won’t hugely imperil Britain, Europe or the rest of the developed world. We remember oil troubles from decades ago, when Opec embargoes sparked sky-high prices and shortages worldwide. Memories of “stagflation” in the 1970s — characterised by a double-dip recession, double-digit inflation and feared second world war-style petrol rationing — still linger. Yet massively fading energy intensity means that can’t happen again.
Everywhere in the developed world, services now far outweigh manufacturing. The UK service sector is about 79 per cent of GDP.
Heavy industry, including construction, is roughly 20 per cent (agriculture adds the remaining 1 per cent). Service firms use less energy. Even manufacturing firms have cut their energy use. The upshot is that while the UK still consumes lots of oil, consumption is down from the early 1990s — despite GDP rising.
In 1995, every thousand tons of oil Britain consumed supported £19.7m in inflation-adjusted GDP. Now that figure stands at £35.8m.
Excluding China, India and the US, global demand for oil was flat in 2018 reflecting weaker manufacturing. But buoyant services kept growth afloat — including the UK, where GDP grew 1.4 per cent in 2018.
The same thing happened in 2015-16, when oil sank as low as $26 per barrel — far below today’s level of around $65. Folks feared weak demand would infect the whole economy. Yet UK GDP expanded throughout that period, growing 2.3 per cent and 1.8 per cent in 2015 and 2016, respectively. It was the same story for Europe and the US. Although major energy producing nations were hurt, most of the world was fine.
Oil’s rollercoaster ride may continue, but history tells us that investors should not sweat these swings. Age-old fears over the oil price — whether rising or falling — are simply an indicator that sentiment is low, setting up a positive surprise as economic growth persists.
Ken Fisher is the founder and executive chairman of Fisher Investments and chairman and director of Fisher Investments Europe. Twitter: @KennethLFisher.