By FirstWave Financial
Low gas prices are a good thing – right?
It doesn’t seem that long ago when the price of regular unleaded gas was nearly $4 per gallon and a lot more than that for high test or diesel. If you drove a full-size pickup truck you might have paid $100 or more for a fill-up. Now with prices below $2 per gallon for regular, the economic cost of a fill-up is much less painful. That’s a good thing.
Gas prices affect more than just the cost to fill up at the gas station; gas prices have an effect on the broader economy. In general, lower gas prices can be a stimulant to the economy. As consumers spend less of their income on gasoline they have relatively more to spend on other, more discretionary items at the mall, shopping center, or online.
Retailers not only benefit by increased discretionary spending in periods of lower gas prices but also in the lower expenses they themselves experience associated with decreased shipping costs. Anything that has to be shipped – from apples to electronics – could cost less as gas prices fall. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum and refining. Lower oil prices mean lower prices for these materials too.
There are other industries that benefit from lower oil prices like public transportation and airlines, but some parts of the economy are negatively affected by low gas prices.
In recent years, U.S. energy production has increased to the point that we are now energy independent. This has had wide-ranging economic and geopolitical effects now that we are no longer dependent on foreign oil from other countries. Our current domestic energy infrastructure and capability are built upon the profitable operation of energy companies who must be able to sell their products at prices sufficient to stay in operation. Very low energy prices could threaten the survival of some of these energy companies and the energy independence they helped create. If, when energy prices rebound, we find ourselves again dependent on foreign oil; that would not be a good thing.
Alternative energy efforts are also hampered by low gas prices. For many people, the choice about whether or not to put solar panels on the roof of their home is dependent on how long it takes to recover the additional cost they will incur through future energy cost savings. Lower cost of traditional energy only lengthens that payback period of time, working to dissuade people from making the significant up-front investment in the solar panels.
Like many factors at work in our world, gas prices have multiple and complex effects on our interconnected and interrelated domestic and international economies. What is the investment strategy that can help stabilize your portfolio even with all this tugging and pulling going on from all sides?
Diversification is the process of spreading your investment portfolio across the various asset classes that make up the global economy to help capture performance when it occurs and reduce risk or volatility when compared with trying to pick the winners or losers of a particular economic event like changing gas prices. Instead, you are more likely to catch the FirstWave of performance in the positively affected asset classes because you already owned them before the performance occurred. This is why global diversification is so important to your successful, long-term investment results.
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You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.