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What Do Rising Oil Prices Really Mean for the Economy?
Mar 21, 2022 — Discussion of rising oil prices worldwide has been virtually inescapable, especially for the nearly 300 million Americans who require gasoline for their daily transportation. This latest spike in the price per barrel of crude oil is the highest it’s been since the 2008 economic recession.
The causes for this most recent spike are primarily (though not entirely) related to the Russian invasion of Ukraine. Russian wells provide approximately 11% of the world’s oil, which means that sanctions and embargoes have created a disruption in the distribution of oil from Russia to the rest of Europe.
Leftover supply chain issues, and production delays, both as a result of the COVID-19 pandemic that’s slammed the United States economy over the last two years, are also contributing factors in the soar in oil prices.
The United States is the world’s largest producer of oil, so an embargo on Russian oil doesn’t greatly impact prices here- but it does upset the global economy, and causes major problems for Europe and China in particular.
Glen Kashetsky, a Financial Advisor & Partner with Oxford Harriman & Company in New York City, has speculated that the 85% increase in WTI (West Texas Intermediate) over the past year may have even more serious economic consequences than currently anticipated.
In order to understand the far-reaching implications of continually rising, and fluctuating, oil prices, Glen Kashetsky explains, “Oil’s use as a transportation fuel means it touches nearly every aspect of the economy, and oil is used as an input in many products… Higher oil prices increase costs, which in turn pressures economic activity.”
It’s true that oil prices greatly influence consumer spending and therefore economic growth as a whole. Kashetsky continues, “A simple example is when a family decides not to take a long road trip vacation, meaning less lodging demand, dining out, tourist excursions- and a related drop in local tax dollars. It all adds up.”
Essentially, higher gas prices mean that people will have no choice but to think twice before taking unnecessary trips; less people out and about means less money put back into the economy, which has a ripple effect on the economic health of the United States and the world.
A strained economy is not the only negative side effect of the current gas and oil prices. Glen Kashetsky speculates that oil prices can serve as an indicator of approaching financial recession. “There are a limited number of times when oil prices increased more than 85% during a year… This has typically occurred near the time of a recession. Some instances occurred during recessions- for example, the third quarter of 1990 and second quarter of 2008. Some occurred ahead of a recession, like the fourth quarter of 1999,” he explains.
Glen Kashetsky is not alone in his speculation of economic troubles to come. Goldman Sachs reportedly estimated the chances of a coming recession in the United States at 20-35%. Prior to the Russian invasion of Ukraine, overall improvement in the economy was anticipated for 2022, but now all bets are off.
Some might say that predicting a recession due to current oil and gas prices is unnecessarily alarmist – but the numbers don’t lie. Historically, every time there’s been a spike in oil prices, major economic upset has followed.
So what’s the solution? Glen Kashetsky is cautious to make any explicit predictions while the economy is still volatile and the question of a larger-scale war involving NATO hangs in the air.
Kashetsky and Oxford Harriman & Company offer confidence to those concerned about their investment portfolios- the market may be unpredictable for now, but there are certainly ways to help mitigate financial risk. Portfolio diversification and reallocation can be excellent ways to take action for a secure financial future.
A struggling economy and rising oil prices may be stressful for now, but they should certainly not last forever. It’s important to do what you can to keep your assets intact and remember that, inevitably, after an economic recession comes a period of growth.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Oxford Harriman & Company is a separate entity from WFAFN. CAR-0322-03375