Do Rising Oil Prices Signal Higher Inflation?
Now that the main oil-producing states have come to an agreement to cut oil production, there's reason to believe that energy prices could soon be on the rise.
In this segment of Industry Focus: Financials, The Motley Fool's Gaby Lapera and contributor John Maxfield discuss one way this could have a wider impact on the U.S. economy -- namely, through higher inflation.
A full transcript follows the video.
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This podcast was recorded on Dec. 5, 2016.
Gaby Lapera: Let's turn to energy prices. I don't know if you've noticed, but they are down.
John Maxfield:They're way down. There's two ways to thinkabout it. Over the longer term, they're way down. Going into the crisis, they were well above $100 a barrel. But now, they're around $50 a barrel. However, if you look atwhere we were in January when they were $25 a barrel, they're double that. Let me tie this back into inflation and all these different things. Whenyou think about energy prices, they areone of the central components of inflation. That's even if you factor out the price changes in energy prices directly, because they have a big indirect impact on the economy. Let's say you want to buy something at whatever it is,Wal-MartorTarget. That thinghas to get to Wal-Mart or Target,and they generally have to get there in a truck. Well,the truck takes gas. So the higher the price of gas, thehigher the price of all those goods,because that all has to be factored in. Well, as gas has droppedover the past few years -- and then, consider that there were periods last year where there was deflation in the overall economy, itcertainly doesn't seem like that's a coincidence. As these oil and gas prices come up, which they'relikely to do because OPEC,Russia, and Iran just came to an agreement to cut production -- as those come up, that too is probably going to have apositive impact on inflation. So, all of these signs are pointing in thepositive direction for the economy.
Lapera:Absolutely. Just so people whoaren't as familiar with this/don'tremember the 1970s, OPEC is theOrganization of the Petroleum Exporting Countries. I believe that includes a lot of differentcountries, excepting Russia and a few others. So, it's interesting that they all managed to get together and agree to drop the amount of oil they're producing. And that doesn't just affect consumer stuff and whatnot, it also affects, obviously, the oil companies. Rig count is way down for the oil companies, because they'renot going to be producing as much oil.
Maxfield:Yeah,if you look back at the beginning of January, this is according to theBaker HughesU.S. crude oil rig count, there were roughly 1,600 U.S. crude oil rigs in operation. And this is the reason OPEC got together and said, "We're going to boost up supply to drop the price, in order to get these new frackers and higher-expense production companies in the United States, let's drive them into bankruptcy." And that's exactly what they've done, or at least caused them to close their rigs. Rig count has gone from 1,600 in the United States in January down to, it looks like it bottomed out maybe around 300 in April-June of this year. Now, it's back up, as energy prices have started to recover, to around something like 500. There is a huge impact that the United States is going to see as a result of rising oil prices.
Gaby Lapera has no position in any stocks mentioned. John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.