This has contributed in different ways to the financial fortunes of different oil companies.
Ups and more ups
For example, it helped Shell announce profits of nearly £5bn in the first quarter of this year, a 12-month increase of 11%. Its profits were up last year to $31.2bn, $20.5bn in 2010.However, the US oil giant Exxon spent $5bn in the first quarter buying back shares, with a similar outlay expected in Q2. Its own oil production fell by 5% in the first three months of this year.
The reaction to oil’s increase in price this has been muted, certainly from the petrol-guzzling paying punter who seems to have taken the increase on the chin and is simply paying the increased prices without a murmur.
But what does the rise mean away from the garage forecourts? Should we be more concerned about a broader, negative economic impact?
According to Markets.com’s chief economist, Bill Hubard, a penny rise in pump prices adds $1bn to the total petrol bill; a $10 rise adds 0.3% to inflation.
Thankfully the impact does not follow a one-for-one pattern with the price rise as any trend is never in a straight line. Prices rose from around $110 a barrel in the middle of January this year, to $125 by mid-February, and are now down to nearer $120. But the overall upward trend will, given the relative importance of consumer spending to the UK economy, push inflation upwards and this will concern policy makers.
Figures out yesterday from the Office of National Statistics showed the UK has hit its double-dip recession, with GDP falling by 0.2% in Q1 2012 on top of a fall of 0.3% in Q4 last year.
Hubard suggests that if oil prices reach $150 a barrel this will take around 0.3% per year off any economic growth per annum and push GDP down again in the next quarter.
Consumer spending slowdown
“In the UK, the overall effect of an oil price shock on the level of output in the medium term could well be higher than for the eurozone. The exact nature of oil price movements remains unclear, but an upward trend would be a significant drag on the fragile UK consumer spending recovery,” he warns.
The counter to this is that the link between the rate of consumption of oil for every additional unit of GDP is in decline. That means countries’ economies are growing by far more than its consumption of oil. For example, the US grew its economy by 124% between 1979 and 2010; over the same period its consumption of oil increased by just 3.8%.
As for oil’s long-term price trend, according to Gary Reynolds, Courtiers’ chief investment officer: “Oil prices are likely to come under downward pressure in the foreseeable future. Remember, the beleaguered consumer is still paying down debt, so an increase in the cost of filling the tank results in fewer purchases elsewhere and so the economy slows, and when that happens, demand for oil drops and we are back to the good old economics of supply and demand.”
The fact oil has risen by 25%+ in just over a year should be factored into any investor’s macro view on the world, but its future impact will depend on whether you believe Hubard or Reynolds.
I’m with Reynolds.
