What are the effects of higher oil prices?

Oil price sentiment was recently thrown in disarray because of the oil field attacks in Saudi Arabia. The price of oil momentarily jumped higher as fears emerged there may be a shortage of fuel. Rising oil prices can cause inflation and cripple economic growth. In this article we discuss what can happen when the price of oil rises.

Pros

Higher Share Prices

A higher oil price is good for oil suppliers and energy companies. It becomes a positive for their profits and this can then translate to higher share prices for these companies.

Creates more jobs in the oil sector

High oil prices can mean more jobs for oil companies. With the higher revenue generated from higher oil prices, these companies can expand by hiring more workers and grow their business.

Green Energy

Higher oil prices may deter consumers from using energy sources created from oil. It may encourage the consumers to further look into green energy and preserve the environment.

Boost export GDP

Higher oil prices could mean a higher export component of GDP for oil-exporting countries.

Cons

Higher utility bills for consumers

Higher oil prices may mean higher profits for energy companies but it also means higher utility bills for consumers.

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Decreased consumer spending

The increase in oil prices may mean consumers will need to allocate more money to petrol etc. This may lead to them having less money for discretionary items such as clothing, eating out, and entertainment. This is a negative for stocks in the consumer discretionary sector as these sectors will see a decrease in demand.

Higher transportation and manufacturing costs

Companies will pass on increased costs from higher oil prices to their consumers and goods and services will become more expensive for consumers. If the cost of living becomes too expensive, then this could increase inflation.

Decrease economic growth

The consequence of reduced consumer spending can lead to lower economic growth. Companies will see a drop in demand in products and services which could then lead to redundancy and cost cutting. This then creates further problems as a high unemployment rate means more households will have budgets constraints, which in turn will restrict their spending.

Lower profits for airline companies

Higher oil prices will cause airline companies to pass these costs onto the consumer. However, these higher airfares may discourage passengers from buying airline tickets which could cause a decrease company profits.

Lauren Hua is a private client adviser at Fairmont Equities.

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