How Will Oil Prices and Consumer Spending Impact Markets?

According to the March 2022 Short-Term Energy Outlook (STEO) from the U.S. Energy Information Administration (EIA), the forecast is for high energy prices in 2022. The report found that Brent crude oil, used as a benchmark ex-U.S., is expected to see prices of $116 per barrel in Q2 of 2022. West Texas Intermediate (WTI), the price the U.S. uses as a benchmark, is expected to cost consumers, on average, $4.10 a gallon in Q2 of 2022.

The World Economic Forum blames volatile oil and energy prices in general on demand outstripping supply. This is attributed to OPEC not expressing a sense of urgency to ramp up supply, having a certain amount of spare capacity, and not being in a rush to create a glut in supply for global markets. Additionally, it’s attributed the lack of new exploration and resulting supplies coming online due to the shock of oil falling to -$40 per barrel during the COVID-19 pandemic. It also includes the transition to greener forms of energy, including pressure from activist investors looking to transition from fossil fuels. Hence, there are multiple factors putting pressure on traditional sources of fuel.

Looking further at the U.S. EIA’s March 2022 STEO, the price is expected to remain well above average. West Texas Intermediate (WTI) is projected to be $113 per barrel in March and average $112 per barrel in Q2 of 2022. The price per gallon domestically is projected to hit $4.12 in May of 2022, then drop through the rest of 2022. Over the entire year, the price per gallon of gas is projected to be $3.79 per gallon (the most expensive since 2014), and average lower to $3.33 per gallon in 2023.

It’s important to note that the EIA’s STEO was completed prior to the U.S. government’s March ban on importation of oil, liquified natural gas and coal from Russia, along with the United Kingdom announcing it was phasing out Russian oil imports by the end of 2022. The European Union also communicated that it would “significantly reduce fossil fuels” from Europe before 2030. These announcements were coupled with multi-national oil companies declaring plans to cease operations in Russia and end partnerships. These actions are expected to lower oil production by Russia, but the ultimate outcome is dependent on global reactions and how they impact fuel stocks.

When it comes to seeing how increased and likely sustained fuel prices will impact economies, history is a helpful guide to predict how things might play out in 2022. According to the Federal Reserve Bank of San Francisco (FRBSF), their data examines “the price of oil since the early 1950s.” According to the National Bureau of Economic Research, 1973 ushered in a period of volatility for oil, which contrasts with the FRBSF’s data on relatively stable prices through the 1950s.

In 1973, the Yom Kippur War disrupted prices and again the Iranian Revolution of 1979 saw another disruption. These energy market interruptions were both full of tepid expansion, hot inflation and too few jobs available for job seekers.  

Often considered a hidden tax on households, out of control inflation takes consumer interest away from other services and goods due to lowering a household’s affluence, along with giving consumers less economic certainty going forward. According to the Federal Reserve Bank of San Francisco, a 2007 study found that five of the past seven recessions occurred shortly after oil prices climbed substantially, attributed in part to lower levels of income and a less certain outlook for the economy.

As prices for gasoline increase, how much consumers will likely spend on other goods and services varies, according to a National Bureau of Economic Research paper titled “The Response of Consumer Spending to Changes in Gasoline Prices.” This research looked at the impact of gas falling during 2014. Based on U.S. Consumer Survey, the average total household spending was $53,495 in 2014, with $2,468 spent on gasoline per household in 2014. The same report points out that while crude was $100 per barrel in mid-2014, it went to sub-$50 per barrel by January 2015.

It’s important to keep in mind that while the price of oil was quite volatile, on par with that of the 1970s, inflation during the 1990s and 2000s didn’t really make material increases to inflation levels, impact GDP expansion negatively or lower the unemployment rate. The divergence and less deleterious effects of inflation during the 1990s and 2000s were likely set off by big gains in productivity realized in the first decade of the 21st century.

There’s nuance when determining if rising oil prices are helpful, hurtful or neutral for stock and market performances, according to a U.S. Energy Information Administration 2017 report called “Oil Prices and Stock Markets.” The study points out that looking at sectors or industries will give us a better picture of how oil prices impact stocks – whether it’s good, bad or neutral. For example, the study gives three ways to measure stock performance considering oil prices: “oil-users, oil-substitutes or non-oil-related.”

For example, all segments of the exploration, extraction, processing and refining of different energies (coal, natural gas, crude oil, etc.) will naturally see benefits. However, when it comes to manufacturers, transportation companies or food suppliers, these industries will see downward pressure on their earnings (and therefore stock price) due to pressure on increases of inputs and the mixed ability to pass on costs to consumers.

While the outlook for crude oil cannot be determined and geopolitical and economic conditions are fluid, it depends upon the sector and how businesses are managed when it comes to the probability of profitability of publicly traded stocks.