Oil prices continue to surge on the back of the crisis in Ukraine, and a growing amount of Russian energy exports look to be cut off from international markets. But Ken Fisher argues oil’s impact on the broader global economy is more nuanced than at first glance.
Originally published in Japanese on Apr. 20, 2022
The power of economic self-interest
How high will already sky-high oil prices climb? Nosebleed energy prices surely sting. Talk of Japan or Europe joining the U.S. and U.K.’s Russian energy bans fans further fears of a global bear market and recession. But economically, oil’s tale is nuanced. The current Russian bans are mostly symbolism. Japan is unlikely to follow, nor is heavily Russia-reliant Europe. Moreover, high oil prices mostly shift output and consumption but do not squash it outright.
Yes, Russia is a huge oil producer, providing for about 10% of total global oil consumption. Yes, Japan gets about 5% of its oil imports from Russia, plus 9% of its natural gas imports via the Sakhalin 2 project — not insignificant, especially given the dearth of domestic options to replace it. But so far, a Japanese ban looks unlikely, with Prime Minister Fumio Kishida, whose own Hiroshima district is reliant on Russian gas, stressing both Sakhalin projects’ importance.
Ken Fisher, the Founder and Executive Chairman of Fisher Investments
The ballyhooed bans of America and the U.K. are mostly symbolic. The U.S. is a net exporter of oil products, importing a slight amount of easily replaced Russian product. Britain imports 8% of its oil and 4% of its natural gas from Russia. Big, but not huge.An EU ban could create a starker supply shock, potentially creating further global price spikes. The EU gets 27% of its crude oil and 41% of its gas from Russia. That is big, and EU leaders know it. That is why Germany and others have recently squashed talk of a full embargo.
Would Russia halt global shipments? Maybe, but oil and gas account for about half of Russia’s exports and 36% its budget. Halting exports would be cataclysmic for Putin’s payroll.
Picking up the slack
Other global producers, particularly in America, will make up for Russian shortfalls. Japanese gas companies are now looking to Australia, the U.S. and Malaysia for more supply. Ship-position data show fleets carrying U.S. gas headed to Europe. The EU’s new U.S. liquefied natural gas (LNG) deal provides another boost. High prices will tantalize U.S. producers to juice output faster than cynics contend.
U.S. oil production is up 1.3 million barrels per day since it bottomed in September 2020. Government estimates see output averaging 12.0 million barrels per day in 2022, up from December’s 11.6 million, with 13.0 million in 2023. Private-sector forecasters expect even more. Gross domestic product (GDP) data show inflation-adjusted mining and oil drilling structure investment jumped 57.7% from third-quarter 2020 to fourth-quarter 2021. If prices stay high, output may exceed all estimates.
Private-sector boycotts? Some, like Eneos and Idemitsu Kosan, have simple workarounds. Eneos says it can easily find alternatives in spot gas markets, while negligible amounts of Idemitsu’s gas were Russian anyway. Significant boycotts are like severe dieting: unlikely to last. Russia’s Urals oil blend trades over $30 per barrel below the Brent global benchmark. This rare arbitrage opportunity will entice buyers content to deal with pariah countries. India and China are buying heavily. Black market realities will erase hesitancy. Over half the world’s population is in countries not participating in the sanctions over the invasion.
Oil's power declines
Oil prices have far less macroeconomic impact than is feared. From 2011’s start through the third-quarter 2014, Brent prices frequently topped $100 per barrel. Even with setbacks from the 2011 earthquake and tsunami, the 2014 consumption tax hike and other economic headwinds, Japanese household consumption still grew. The increase was tepid, but in line with Japan’s recent history when oil’s price is low. This makes sense: While not terribly thrilling, oil and gas spending is still spending. Price shifts merely shuffle yen from one bucket to another (25 + 75 = 100… and also 35 + 65 = 100).
Higher oil prices also promote investment. Consider America’s 2010s energy boom. During that the first-quarter 2011 – third-quarter 2014 stretch, mine and well investment rose 47%, topping non-energy business investment’s 30% increase. When oil prices tumbled, energy investment plummeted. Oil’s climb even benefits renewables, making their higher-cost generation more attractive.
Nosebleed oil prices do hurt some non-energy businesses but don’t wreck total profits. From 2011 – 2014, with oil frequently over $100, global corporate profits grew 18.2%. World stocks gained 115.0%. Amid 2015’s -33.8% Brent plunge, profits fell -8.0%!
Despite presumptions, rising oil prices aren’t really bad for stocks. High oil in 2008 was coincidence, not causation. The long-term correlation between the two globally is literally zero. For example, oil was sky-high when the TOPIX soared off its multi-year mid-2012 slump.
Higher oil prices do pinch many, which is unfortunate. But the broader global economy matters for markets, and oil’s economic sway is exaggerated. Fear of a false factor is always bullish, and rising oil prices should not scare investors from stocks as the bull market now resumes.
Ken Fisher is Founder and Executive Chairman of Fisher Investments, a $200 billion global investment management firm spanning Asia, North America, Europe, Australasia and the Middle East. He is author of 11 books including four New York Times Bestsellers and writes customized columns in leading publications in 15 countries. He lives in Dallas, Texas. The views expressed here are his own.
