Frigid weather across the American south over the last few weeks resulted in state emergencies recently, including in Texas where millions were without power for several days. Texas has an independent energy grid, and yet the disruption to oil production and refineries was felt across global energy markets. So how could the rising cost of energy affect your investments?
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Fossil fuels still rule the energy markets
Energy is a lifeblood of the economy. Yet despite our economy’s increased focus on renewable energy sources, fossil fuels still constitute the vast majority of energy use. Before the COVID-19 crisis, global oil demand had reached 100 million barrels per day.
Oil and natural gas prices tend to be highly correlated with economic booms and bust, as was seen during the mid-2000’s housing bubble when crude reached historic records and, more recently, during the nationwide lockdown when oil prices plummeted. Less than a year later, oil prices have recovered somewhat as the economy has rebounded. These episodes are a reminder that temporary shocks to energy markets can occur at any time, in both directions.
Gasoline prices across the U.S. have been
rising since the pandemic began in 2020
Three key ways energy affects investors and the economy
- Higher energy prices are effectively a tax on consumers and businesses. For instance, gasoline prices have been rising steadily since last year with the national average price of regular unleaded climbing 80 cents to around $2.50 per gallon. Although many Americans are driving less during the pandemic, higher gasoline prices eventually filter through to all goods and services, leaving less to spend on other necessities.
- The performance of the energy sector directly affects the S&P 500.
- EXAMPLE 1: The 2014/2015 oil price crash resulted in an 80% earnings decline for the energy sector, causing an “earnings recession” for the overall market. Although this didn’t result in a broader bear market or economic recession, it was certainly felt by investors and those who work in the industry.
- EXAMPLE 2: Recently, rising oil prices have helped to boost the sector. This, in turn, helped boost the returns of the S&P 500 (energy is one of the 11 sectors that make up the index). While earnings are far from their levels prior to 2014, they have climbed significantly from their 2020 lows. This is one reason that energy sector shares have gained over 20% this year.
- Higher energy prices fuel concerns of rising inflation. While inflation measures usually exclude volatile categories such as food and energy, rapid increases in these prices can make them hard to ignore. So far this year, commodities as a whole have outperformed the S&P 500 as an asset class by returning over 9%.
What are the takeaways for investors?
It will take time for the dust to settle on the recent disruptions in the South. The ongoing challenges to the energy industry may take time to work out as well, especially for those who depend on it for their livelihoods. In the meantime, investors should consider this one of the many ups and downs in their investing experience. The big picture takeaway for investors is that energy prices are higher because of a recovering economy.
Keep investing in your future
Temporary market ups and downs can test the nerves of even the most experienced investors. Just remember: Investing automatically, even in small amounts, can really add up over time. It’s easy to get a portfolio, managed by investing professionals and designed to stand the test of time. Discover effortless investing at MoneyLion.