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The low price of gasoline is great for your day-to-day budget, but how does it relate to your investments?
If you drive long distances (or even anywhere at all, really), you have noticed that gas prices are the lowest they’ve been in nearly two decades. While in the short-term this is easier on your wallet, you may be wondering what’s behind the lower prices and if it should give you pause as you consider the overall economy and your investment portfolio.
First, a quick look at what’s behind the drop in oil prices.
Why so low?
The price of a barrel of oil is now less than half of what it was in early 2014 and is now at its lowest level since 2004. This low price is expected to last for some time. As with most price-related questions, the price of oil is currently low because the supply is high. While worldwide demand for oil may be down slightly due to conservation, fuel-efficient vehicles, and greater reliance on public transportation, the bigger change has been in supply. Production in the United States has nearly doubled in recent years, and other oil-producing nations, including Canada, Russia, and Iraq, continue to increase the amount of oil available for exportation.
The Organization of Petroleum Exporting Countries, OPEC, which has slashed production in the past when supply levels have gotten high, has not slashed production this time around. The reasons behind that are many, varied, and complicated, but the result is lower prices for gas, diesel, and even heating oil.
What It Means for the Overall Economy
Lower oil prices are bad for the energy industry and industries that sell to the energy industry, but they tend to give everyone else extra spending cash in the short-term, and it can particularly benefit lower-income individuals who spend a high proportion of their earnings on gas. Savings at the pump also mean that road trips are cheaper, the costs for long-haul trucking go down, and it usually means, although it hasn’t thus far, cheaper airline flights. Overall, inflation is likely to be low.
Sounds great, right? Well, not exactly. As mentioned in this space previously, small amounts of slow inflation are actually signifiers of growth in the economy. A long-term absence of inflation can signify a weak economy and can be cause for concern about the possibility of deflation. In a deflated economy, lower prices hurt overall revenue discourage entrepreneurship, and can lead to unemployment. People who are out of work don’t spend, and the economy takes a beating.
The overall economy, of course, is made up of many different but inter-related factors. It is impossible to say whether long-term lower oil prices will lead to rough economic times. But it’s something to keep an eye on. And it’s a good reminder that a diversified portfolio is essential at this and all times.