The collapse in oil prices remains a dominant theme in global markets at present.

As highlighted by my colleague Sam Trethewey last week, we believe prices are likely to remain low until a material supply cut occurs https://milfordasset.com/oil-how-low-can-it-go/.

Lower prices are putting significant pressure on the energy industry, and on those countries reliant on energy exports – including many emerging economies.

Against this there is a huge benefit for global consumers and businesses. Lower petrol prices are often referred to as being like a – ‘tax cut’ – because the lower cost of filling a car or truck means people and businesses immediately have more cash in their pockets.

However, there are two factors that are providing a headwind, at least in the short term, to what this ‘tax cut’ effect would normally do to the global economy.

Firstly, the benefit of lower petrol prices is taking time to be passed on to consumers. This can be seen in the higher margins that petrol companies are earning at present on the fuel they are selling. According to the MBIE (Ministry of Business, Innovation and Employment), both petrol and diesel margins in NZ are currently at their highest levels (in trend terms) in the past 6 years.

Higher margins for fuel retailers are also being seen in Australia, and as the IMF recently noted, in several emerging markets.

The second issue is that many consumers globally remain in a reasonably cautious mode, and are preferring to pay off mortgages and debt rather than spend the extra cash. For example, US consumers are now (as of December 2015) saving 5.5% of their disposable incomes, up from 5% in the previous year. This represents a US$78 billion increase in saving over the year. Had this been spent instead of saved, it would have pushed US GDP growth in 2015 closer to 2.5% than the actual 1.8% reported. (Source: Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm)

In the long term this is good news, as it means US consumers are in a stronger, more stable, financial position.

Looking ahead, the good news is that we expect fuel margins will decline over time as businesses in the petrol sector compete with one another. This means lower petrol prices at the pump, and a further boost to consumer spending power.

However, we believe that the inclination for many people to save some of the windfall will remain. That will probably mean that, while still an excellent support for the global consumer at present, lower petrol prices will not provide as significant a boost to growth as in previous decades.

 

David Lewis

Portfolio Manager

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.