Oil Prices and the Ecomomy

When crude oil prices drive gasoline prices higher, consumers may feel the pinch at the pump and notice the impact of rising oil prices on their investments ...

Many businesses may be affected - from companies that make oil-based products to the airline industry.

According to a Federal Reserve Bank of Dallas study, nine of the 10 U.S. recessions since World War II were preceded by spikes in oil prices. But because of lessons from the oil price spikes and energy shortages of the 1970s, 80s, and 90s, the ripple effect of higher oil prices on today's economy is not as great.

Nowadays, the economy generates more of its gross domestic product from the service sector, which is less dependent on energy sources than the manufacturing industry.

However, certain industries that rely on low energy costs to fuel profits, such as transportation and manufacturing, may feel the impact. When energy prices rise, higher consumer prices will follow.

Increased oil prices also influence the financial markets. Higher prices increase manufacturing, transportation, and other costs, which can affect not only a company's bottom line but consumer spending as well.

Increased energy costs for gasoline and heating usually translate into less money that consumers have to spend on cars, vacations, on dining out and etc.

Fortunately, energy costs account for only a small percentage of a company's budget, so higher oil prices may not slow economic growth. Some experts contend that economic growth is far less vulnerable to price changes than in the past. They also point to lower interest rates that spurred mortgage refinancing and federal income tax cuts as mechanisms that reduced the impact of higher oil prices.

In fact, higher oil prices can sometimes be a boon to investors!

Oil and oil-service companies, alternative-source energy companies, and the multitude of companies that support these industries may see significant gains and may be suitable defensive investment opportunities.

Though consumers may feel lighter in the wallet as a result of higher pump prices...

The pinch they feel on their portfolios because of these increases may not be as pronounced!