Why low oil prices hurt the stock market – but won't lead to a US recession
Being a large part of the S&P 500, the energy company sector of the index has decreased by 13%, and has brought the entire index down by 9%. The changes in prices of oil have led to these decreases, and they have also led to the stock market having its worst start to a year ever recorded. However, the writer insists that while it may seem that the American economy as a whole is struggling, this is not necessarily the case under the surface. He makes the point that when including energy companies in the S&P 500, companies' profits on a whole are down 5.8% from last year. Although when energy companies are removed from this analysis, it can be seen that S&P profits are up 5.7%. It can be argued that the immediate concern is not with the US economy, but rather with the global economy; which may ultimately effect the US economy in the long run.
As a result of new techniques to mine for oil, the US has provided more output of oil than any Opec country other than Saudi Arabia, and with such an increase in oil, the demand is by far exceeding the supply. At the same time, economic growth in China, the number one oil consumer, has been rapidly slowing, which does not pair well with the increasing surplus with oil.
Overall, Bruce Kasman, chief economist at JPMorgan Chase, explains that, from history, it can be concluded that steep drops in oil prices have been a sign of a weakening global economy. Julian Jessop, head of commodities research with London-based researchers Capital Economics gives a solution that I agree with when he says, "$60 a barrel would do the trick. High enough to keep the main producers in business but low enough to provide a real boost to the incomes of consumers.”
http://www.theguardian.com/business/2016/jan/21/oil-prices-stock-market-us-recession-economy
The overall affect of the low oil prices abroad can specifically be seen in Russia where their currency has dropped, leaving the Russian government in quite a large deficit.
ReplyDeleteIt will be interesting to see how they control the price of oil and try to bring it to a higher equilibrium price. $60 a barrel seems a target that is difficult to reach.
ReplyDeleteIt's really interesting to see the effect of oil prices on the stock market. It seems like oil prices are currently the lowest they've been since the early 2000s, and the stock market is off to a bad start. However, in 2008, when the stock market was doing horrible, oil prices were extremely high. It almost seems like oil prices have very little impact on the stock market.
ReplyDeleteSelfishly, I look at this in the eyes of the consumer. I believe there is somewhat of a correlation between the oil prices and the stock market, but that is not a direct concern of someone who does not partake in the stock market, and ultimately saves money for the consumer. I read somewhere that the low oil prices can almost be considered as a 'raise' and can save up to $1,000 per year. I'm interested to see how this works out in the future.
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