Why you shouldn’t fret about oil
Ken Fisher explains why swings are a false fear.
One week oil is spiking as Iran attacks tankers in the Strait of Hormuz – threatening to wreck the global economy. The next month, oil drops because tariffs allegedly whack Chinese demand and – you guessed it – wreck the global economy. Tune out these scare stories. They’re both bricks in this bull market’s wall of worry.
Tariffs I’ve addressed in this column before. Even with subsequent escalations, all threatened and newly enacted tariffs since 2017 total just 0.3% of global GDP. Too tiny to render recession. Firms skirt many of these tariffs. America’s soaring Vietnamese and Taiwanese trade shows the sidestepping effect. Relax.
Consider Iran. Today’s fears seem stuck in the 1970s, when the Arab oil embargo contributed to worldwide shortages, stagflation and a ghastly recession. We presume Iran has the power to gyrate prices now by remembering that huge influence back then.
But times changed. Yes, the Strait of Hormuz is a critical oil chokepoint. The Energy Information Administration (EIA) estimates one-fifth of global oil consumption passes through it daily. If it shuttered, prices, which are set globally, would soar. But Iran probably can’t shut the Strait alone. While its seizure of a British tanker stole headlines, that is one ship among many traversing the Strait daily. The U.S. and British navies effectively ensure safe passage for the vast majority.
Then too, this isn’t Iran’s first time threatening traffic. The 1980s “Tanker War” between Iran and Iraq hit scores of oil transports. But prices didn’t jump. Not only was it a fraction of total traffic,
but oil production grew outside the Middle East, offsetting the tiny impact.
That’s the history we’re repeating now – not the 1970s. In the 1980s, the supply offset came from Europe – the North Sea.
Now, it comes from U.S. shale fields including Texas, New Mexico and North Dakota. According to BP’s annual oil report, U.S. production soared by 2.2 million barrels per day in 2018 – the largest, single-country rise ever. The EIA sees domestic output jumping another 1.36 million barrels this year. Unlike producers elsewhere, U.S. rigs can pump profitably at lower prices, thanks to massive efficiency gains.
And if I’m wrong? If prices soar? Again, this isn’t the 1970s. The days when high oil prices could wreck our economy are as gone as disco and bellbottoms.
Our economy is far less energy-intensive now, thanks to the service sector’s ascendance. In 1970, heavy industry was 32.1% of annual output, versus 65.5% for services and 2.4% for agriculture. Now? Heavy industry is just 18.5%, while services are a mighty 80.7%. Services simply use less energy than factories. But even manufacturing has cut energy use in recent decades through enhanced efficiency.
Yes, America consumes lots of oil, and it gets lots more GDP for each barrel of oil consumed. In 1990, we got $13.7 million in inflation-adjusted GDP from every thousand tons of oil consumed. Now, it’s $23.8 million.
Services’ rise debunks one other lingering oil fear: that last year’s weaker demand outside China, India and America reflects a weakening world. In reality,
it simply reflects weaker manufacturing – widely discussed and priced in. Meanwhile, services kept the global economy growing reasonably. They still do now. All this reminds me of 2015 and 2016, when oil plunged to $26 per barrel. Yet GDP in the U.S. grew all the while, rising 2.9% in 2015 and 1.6% in 2016. Only oil-reliant nations hit the skids.
So don’t sweat oil’s swings. They’re false fears that are priced into stocks now. Fear of false factors or tiny negatives is always bullish. The bull market continues.
Ken Fisher is founder and executive chairman of Fisher Investments and is No. 200 on the Forbes 400 list of richest Americans. Follow him on Twitter: @KennethLFisher. The views expressed in this column do not necessarily reflect those of USA TODAY.