Oil's war-driven rise won't fuel a bear market or recession
Higher oil prices is a pinch upon many but the broader economy matters for markets, and oil's economic sway is exaggerated
HOW high will oil prices climb? Global oil price surges have tended to cause fears of a global bear market and recession. Whilst Jurong Island's centrality in Asian oil and oil products trading makes high prices a mixed blessing, if a global recession struck, the hit to world trade would likely send Singapore - and the Straits Times Index - reeling. Nosebleed energy prices can hurt.
Economically, however, oil's tale is nuanced. Current Russian bans are mostly symbolism. Europe is unlikely to follow the United Kingdom and the United States in banning imports. Moreover, high oil prices mostly shift output and consumption around. They don't squash it outright.
Russia is a huge oil producer. Its exports comprise about 10 per cent of total global oil consumption. Even though Singapore gets most of its oil and gas from Middle Eastern suppliers, Malaysia and Australia, prices would likely surge globally if Russian crude were cut off. Refineries and petrochemical facilities would face higher costs, although they could likely pass much, if not all, of that to end consumers. Regardless, with natural gas firing 95 per cent of Singapore's electricity, there would be a hit.
Symbolic ban
Yet, despite the US and UK bans - as well as Singapore's sanctions - Russian oil isn't off the market. The bans pack more symbolism than economic punch.
The US is a net exporter of oil. Its oil product imports from Russia are tiny, and easily replaceable.
Russia has provided 8 per cent of Britain's imported oil and 4 per cent of natural gas. That's still not huge.
The price spike after the bans was about fear - mostly, fears of what the European Union may do. Russia supplies 27 per cent of EU crude oil imports and 41 per cent of gas. That is big, and EU leaders know it. Hence, Germany and others have squashed talks of full embargoes.
Would Russia halt shipments? Maybe, but energy is 62 per cent of Russia's EU exports. Halting exports puts Russia's energy-dependent budget into an unnecessary tailspin.
If Russian gas and oil stopped flowing to Europe, America could send more gas Europe's way. Ship position data already show fleets of gas-carrying ships en route. The EU's new US liquefied natural gas (LNG) deal provides another boost. High prices will tantalise US producers to juice output faster than cynics contend.
America will help with oil, too. US crude production is up 1.3 million barrels per day since September 2020's bottom. Government estimates see output averaging 12 million barrels per day this year, up from December's 11.6 million, with a near-record 13 million in 2023. Private-sector forecasters expect even more.
GDP data show inflation-adjusted mining and oil drilling structure investment jumped 57.7 per cent from Q3 2020 to Q4 2021. If prices stay high, output could easily exceed all estimates.
Unlikely to last
Some fear private sector boycotts stanching Russian oil trade. But the boycotts are like severe dieting - unlikely to last. Russia's Urals oil blend trades over US$30 per barrel below Brent, the global benchmark. This rare arbitrage opportunity is enticing buyers. India and China are buying heavily. Black market realities will erase hesitancy.
Besides, oil prices' macroeconomic impact is less than feared. From 2011's start through Q3 2014, Brent prices frequently topped US$100 per barrel. After factoring in inflation, that price is higher than what it is today. Yet, Singapore's consumer spending rose in 13 of those 15 quarters. US and EU total consumer spending still increased. This makes sense. Whilst not thrilling, energy spending is still spending. Price shifts merely shift it from one bucket to another.
Higher oil prices also promote oil investment. Consider America's 2010's energy boom. During that Q1 2011-Q3 2014 stretch, real mine and well investment rose 47 per cent - topping non-energy business investment's 30 per cent rise. When oil prices tumbled, energy investment plummeted. Oil's climb even benefits renewables, making their higher-cost generation relatively more attractive.
Nosebleed oil prices aren't great for some non-energy businesses but don't automatically wreck profits.
From 2011 to 2014, with oil frequently over US$100, global companies' profits grew 18.2 per cent. World stocks gained 50.4 per cent. Yes, the STI wobbled as investors worried about slowing Chinese growth. But it still rose 19.1 per cent over this span. Rising oil prices just aren't an automatic negative for stocks.
I don't dismiss higher oil prices' pinch upon many - including you, the reader, or your business. But the broader economy matters for markets, and oil's economic sway is exaggerated. Fear of a false factor is always bullish. Don't let rising prices scare you from stocks.
The writer is the founder, executive chairman and co-chief investment officer of Fisher Investments, an independent investment adviser serving both individual and institutional investors globally.
