Economic Resurgence and the Future of Oil Prices

If you’re like me, you probably never want to hear the phrase “Polar Vortex” again. As most of us can attest, this was an unusually cold winter for most of the country. Substantial snowfall in many cities and record low temperatures in others meant more bundling up, less time spent outdoors, and, in many cases, heating bill sticker shock.

Here in Atlanta, this is the first week where highs have consistently reached the 70's. I celebrated by getting a mean sunburn on Sunday, but let’s move on…

Resurgence likely?

During the first quarters of 2011, 2012, and 2013, we saw strong gains in the stock market, but that trend failed to see its way into 2014. There are three primary reasons for this:

1.     geopolitical developments
2.   the Federal Reserve’s bond-buying taper
3.  bad weather (my sunburn notwithstanding)

All of these issues weighed on economic growth and corporate earnings, and the impact, on the whole, wasn't a positive one for investors.

Thankfully, most economists expect the economy to snap back in the second quarter with GDP growth estimates as high as 3.6% after an anemic 1.5% in the first quarter. The April Jobs Report, which will be released May 2nd, will be closely watched for any signs of renewed economic strength.

And while stock market volatility has picked up in the last six weeks, the biggest losses have generally occurred in high-flying momentum stocks in the biotech and technology sectors. Companies like Facebook, Twitter, Netflix, Tesla Motors, Gilead Sciences, and Vertex Pharmaceuticals saw shares drop 15%-35% from earlier highs.

Oil prices

Looking out a bit further, I came across an insightful article in Barron’s that analyzes the future of oil prices.

For many years, a popular theory has stated that the world was rapidly approaching, or had already reached, “peak” oil – that is, oil production would decrease as supplies began disappearing. Prices, of course, would skyrocket, leading to worldwide economic shocks and market declines.

Recently, however, technological innovation in the energy sector has led oil exploration and production companies to deepwater oil, shale oil, and oil sands, all of which hold vast potential for increased production opportunities.  When you combine the increased oil supply with lower demand thanks to alternative fuels like natural gas, one can make a strong case for oil prices dropping over the next five years. Here’s what Barron’s had to say:

“The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the U.S. economy while potentially crippling the economy of Vladimir Putin's Russia. Vast new discoveries of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a barrel over the next five years from a current $100.”

Click here to read the article.

The takeaway? Evidence suggests peak oil sophistry is approaching its peak (pun intended) and that innovation can, in fact, provide new opportunities for oil exploration and production. Lower energy costs would also provide a major boost to the economy and benefit everybody, especially lower income families.

So kick off your shoes, open the windows, and be glad winter is over. And if you’re planning to celebrate out-of-doors, just be sure to wear plenty of sunscreen. Trust me on that one.