The good and bad of low oil prices
Posted January 15, 2016
Raleigh, N.C. — Plummeting oil prices benefit consumers while hurting savers.
Crude oil is selling for less than $30 a barrel, prices not seen in more than a dozen years.
Although that translates into gas prices under $2 a gallon, Raleigh financial adviser Gerald Townsend said cheap oil does have a downside.
"Yes, you just saved some money filling your gas tank, but guess what? Your 401(k) balance just went down $1,000 because you own some oil stocks either directly or indirectly," Townsend said.
The plunge in oil prices – crude was selling for more than $100 a barrel as recently as the summer of 2014 – has exacerbated wild swings on Wall Street. The Dow Jones industrial average slid another 390 points on Friday, and major stock indexes are off to their worst two-week start to a year in history.
"Ultimately, if oil does not recover, we cannot get a recovery," Townsend said.
The oil situation is simple economics, he said.
"Supply is up because the U.S. very successfully got into 'fracking,' and we've now become a net exporter of oil for the first time in decades," he said, adding, "Countries like Saudi Arabia, even as prices dropped, just continued pumping oil."
Meanwhile, global demand for oil has dropped as China's economy has slowed.
The North Carolina Petroleum Marketers Association said gas prices will likely move upward in the summer, when demand picks up.
In the mean time, however, a lot of investors are nervous.
"We are holding a lot of hands, and everyone wants to talk," said Jon Dewar, head of LPL Financial's RetirementGeeks.com. "In 2008, we were down almost 60 percent from the high. Here, we are down 8 percent in the new year. I don't think they need to panic yet, but we need to be paying attention because there is the Federal Reserve, China and the election, and oil is down and there is a lot of things we need to be following."
Dewar said people need to think about of their financial journey like a road trip: When you come up to a curve, you don't want to drive off the road. Instead, make some corrections to stay on the correct path.
"You might actually want to buy or put insurance on what you have. There are a lot of options you have when you panic," he said.