After a valley in oil prices in recent years, oil prices are starting to make headlines again—only this time, investors are saying oil prices may continue to surge to higher levels.
In 2018, the average oil price per barrel has already well eclipsed the average oil price per barrel in 2017, which is leading investors and consumers alike to wonder how this could impact their finances.
But do oil prices really have a marked effect on consumers—and if so, just how pronounced are these effects? Here are some surprising ways rising oil prices can impact your finances.
1. Increased Profits for Some Investments
While consumers are likely to notice higher prices in oil-dependent businesses, such as airlines, they also might see that their investment portfolio performs well in other areas. Those who own stocks in the energy field, for example, might notice that the increased revenues from oil prices drive up stock prices as well. For large energy companies capable of withstanding the ups and downs in the oil market, this can lead to higher dividend payouts as well. According to Time Magazine, investors can look to ETFs that focus on energy sector names to capitalize on the current trends.
Higher prices for oil can also incentivize the expansion of the oil industry in general, leading to more exploration and innovation. If consumer demand for oil changes, energy companies are then incentivized to find alternatives.
2. Inflationary Action and Higher Costs on Goods
Keep in mind that high oil prices have the potential to drive up prices for many items, even those that may seem unrelated. Economists, such as Alan Greenspan, warn that higher oil prices are inflationary. In the eyes of some economists, higher oil prices could lead to inflation on the prices of consumer goods, such as groceries. The same is said to be true for any energy-dependent sector such as air travel, where consumers may have to foot the bill for higher energy prices in the form of higher airfare.
3. Higher Prices at the Pump, but Not as Much as You Might Imagine
According to the U.S. Energy Information Administration, the cost of crude oil is the most important factor in the retail price of gasoline. However, it isn’t the only component. Taxes, refining costs and distribution and marketing costs all play a role in what you pay at the pump. In addition, there are several short run factors, like weather, that might cause a divergence between oil and gas prices. So, those expecting a sudden doom because of higher oil prices may find that the increase at the pump is more of a minor annoyance.
Thwarting the Challenges of High Oil Prices
Given all the news surrounding high oil prices, it’s only natural to wonder how to prepare for the prospect of higher oil prices affecting your bottom-line finances. Here are a few suggestions for dealing with blows to your budget.
- Review your investment portfolio. It might be time to take a second look at your portfolio and evaluate whether you have enough exposure to the energy sector. In addition to re-evaluating your portfolio, start tightening your budget to prepare for the potential of higher priced consumer goods, and keep putting money away for retirement.
- Get credit card points for gas-related expenses. If you were on the fence about applying for a new credit card, it might be time to take the leap and get something that rewards you for gas station expenses. There are several credit cards that are available that allow you to earn money back for your expenses at the pump. This can be an excellent way to recoup some of the costs you may face from higher gas prices. Alternatively, consider paying with cash, as often times gas stations will offer lower gas prices for paying for your purchase with hard cash.
- Take advantage of airline miles. Because airfare prices can sneak upward during times of high oil prices, it’s important to take advantage of airline miles. Consider signing up for an airline loyalty program to start earning rewards for your flights, especially if you’re already loyal to a particular airline. Earning enough airline miles can get you free flights, so why not take advantage of something you are likely to do anyways?
Higher oil prices don’t mark the end of the world—but they should be a concern for anyone who wants to keep a tight lid on their budget.
Joe Resendiz is a Research Analyst at ValuePenguin, where he focuses on personal finance and credit research to assist consumers. Previously, Joe specialized on public sector and infrastructure financing at Goldman Sachs. He graduated from the University of Texas at Austin with a BBA in Finance.
Read on The Source