Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
High crude oil prices are a blessing in disguise - Outside View by Asad Dossani
High crude oil prices are a blessing in disguise

As crude oil prices approach their highest levels in the last two years, fears are growing that economic growth could be negatively affected as a result. If prices do continue to climb and eventually pass the US$ 100 per barrel mark, these fears will only intensify. It is possible that this could happen sometime next year, if demand remains strong.

Oil demand from emerging economies has been growing as the economies have been growing. Demand from developed economies has also started to grow, as their economies start recovering. The rise in oil prices is in large part driven by the fact that economies are growing and GDP is rising. Do these rising oil prices pose a threat to the global economy?

Given that most production requires the use of oil, a high oil price does increase costs for businesses, and ultimately consumers. It can cause economic stagnation. There are only two ways in which this problem can be solved. First, we can increase the supply of oil so thatís its price falls, and we have more oil available to create goods and services. This will reduce costs, increase growth, and be good for everyone.

Unfortunately, oil is a finite resource, and increasing the supply is not a viable long-term solution. In the short-run it can be done to temporarily reduce prices. In the long-term, supply is constrained. The other way in which we can solve this problem is to use less oil in the first place, while still maintaining economic growth.

This solution requires improvements in technology that allow us to use less oil. We would need to make things more fuel efficient, as well as be able to rely on alternative and more sustainable energy sources. This type of solution is a long-term ongoing process. Technological improvements will happen over time.

What can be done to encourage this behavior? Its simple: A high crude oil price. If we have high oil prices, companies, governments, and other organizations will have a strong incentive to use less oil. This will encourage them to devote efforts to researching alternative energies.

In the short-term, we are very dependent on oil. There is no doubt that we will suffer economically if crude oil prices continue to rise. However, in the long-term, we can be much less dependent, provided we invest in technological improvements to use less oil. And the best way to encourage this investment is by allowing the crude oil price to rise.

We have already seen this occur in some instances. For example, cars are much more fuel-efficient than they used to be. Hybrid and electric cars are good examples of technological improvements that have resulted because fuel prices have been high. Most electronic devices are also more efficient than they once were. New computers use much less energy than computers five or ten years ago. These kinds of improvements only occur due to rising energy costs.

In January 1999, crude oil prices were around $10 per barrel. Despite the price increasing by 9 times that amount over the last 12 years, we are in a much better economic position than we were at that time. I am optimistic that the same thing can occur going forward.

Disclosure: I do not hold the currency/commodity viewed/opined in this column

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


Equitymaster requests your view! Post a comment on "High crude oil prices are a blessing in disguise". Click here!

1 Responses to "High crude oil prices are a blessing in disguise"


Dec 20, 2010

Well articulated and stimulating thoughts. I see high or low prices of any commodity or service for that matter as a way of distribution of resources by the economy. If oil prices remain high, I see two effects-1. the segments receiving more money will invest more in exploration and also consume some of the extra money for their own welfare stimulating economy and 2. the segments paying more will have to re-adjust their consumption by consumiong less or invest in becoming more fuel efficient/ finding alternatives. Either way economy gets a stimulus. Yes the only change is direction and segment reallocation. Why bother endless? Every threat has an opportunity.

Equitymaster requests your view! Post a comment on "High crude oil prices are a blessing in disguise". Click here!

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...


Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms