The Effect of Oil Prices
Oil prices have been going through the roof in 2004 reaching new all time highs with a crude oil price of $55.17 per barrel.
But why is it that the price of crude oil has such an impact on the markets.
Simple! Because the economy of basically every country depends on oil. And unless someone comes up with an alternative solution, it's still going to stay that way for a very long time.
You see, oil has not only got something to do with the fuel that you put in your car. Although that's probably the first visual indicator at the gas stations that everyone sees when oil prices go up.
So the cost for transportation goes up. And not only yours, but that of forwarding companies, for instance, as well. They then charge more for delivering their goods to the customer i.e. corporations and retailers. The retailers and corporations, in turn, then have higher expenses which reduces their earnings. Just think about how much the airline sector depends on oil and how it coherently affects ticket prices.
And that's exactly what makes investors push the panic button. The companies they invested in aren't making so much money anymore so they panic, selling their stocks.
Of course, corporations could increase their prices too which is often the case. But then it's often so, that the end consumer thinks twice about buying a product when prices have risen - depending of course, by how much - which again could reduce earnings. And all these factors are an investors nightmare.
But that's not all. Moreover, oil is used almost everywhere. You'll find it in plastic, rubber, and paint. The chemical industry would break down if it wasn't for oil. Oil is inside every synthetic product, etc, etc ,etc. The list is endless!!!
So, you see now why oil has such an enormous influence and impact on the economy?!
It effects almost every sector of the market - and that's the reason why the stock exchanges react so touchy when oil goes up, and with relief when oil goes down!
Ricky Schmidt
September 18, 2004
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