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Global turmoil or a crude stimulus for the economy?

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The fall in oil prices has had a positive impact on Alliance Trust Investments’ Sustainable Future Funds because its holds very little oil and gas exposed companies, explains Chris Foster, a management trainee at the firm.

This article was originally published on Alliance Trust Investments’ Sustainable Future Hub.

The impact of this oil price fall on the Sustainable Future funds has been very positive in terms of performance, as compared to the stock markets; we hold very little oil and gas exposed companies, as we prefer exposure to cleaner energy and energy efficiency.

In July 2014 the International Monetary Fund (IMF) released a report titled ‘An Uneven Global Recovery Continues’.  One of the key concerns was that “increased geopolitical risks could lead to sharply higher oil prices.” Having consequently fallen by over 50%, We think the IMF would probably agree that predicting the future price of oil is no easy task. We have seen the oil price fall to as low as $47  per barrel already in 2015 – the last time oil prices were this low was early 2009, in the heart of the most recent financial crisis.

Source: Bloomberg data

The reason the price of oil is so difficult to predict is that the dynamics governing what is essentially just a supply and demand relationship are both abundant and complex. We would however argue that there are currently three main factors determining the price of oil:

– The Organisation of Petroleum Exporting Countries (OPEC) have decided not to reduce supply – in the past, Saudi Arabia has led the way on artificially supporting the oil price by curbing supply, however this time, it has decided not to do so. Out of all the oil exporting countries Saudi Arabia has the lowest costs when it comes to extracting oil from the ground; consequently it is comparatively well-placed to tolerate a period of lower oil prices.

– The US shale revolution – in 2014 the US overtook Saudi Arabia to become the world’s biggest oil producer. In the week leading up to the 9th January alone, US crude output surged to 9.19million barrels a day – the fastest pace in weekly records dating back to 1983. That’s amid a global supply surplus of around two million barrels a day and although America does not currently export crude oil, it now imports significantly less.

– Low demand – the combination of weak global economic activity, efficiency gains in both oil extraction and in the products in which oil is consumed, and a growing trend towards other fuel sources, have depressed global demand for oil.

If you combine the above with the fact that Libya and Iraq, despite heavy conflict, continue to produce oil, the supply and demand relationship between the producers of oil and those who consume it, has re-balanced in favour of the consumer.

The global economy – good, or bad?

The IMF estimate that a 10% movement in crude oil prices is associated with a 0.2% change in the world’s Gross Domestic Product (GDP), whilst Oxford Economics estimates that for every $20 fall in the oil price, global growth increases by 0.4%, within 2-3 years. The general consensus is that a low oil price will have a net-positive effect on the global economy. The chart below shows UBS’ calculations of the impact on GDP after one year from a $10 fall in the price of oil.

An obvious consequence of a low oil price is that economic benefits will be re-allocated away from those that produce it, to those that consume it. Countries that import more oil than they export are set to benefit, particularly those that are “battling high inflation and large oil subsidy bills, such as Indonesia and India”, according to Moody’s, the credit rating agency. The big losers include Saudi Arabia, Venezuela, Russia, and Nigeria, whose net exports of oil and oil-related products counted for 43%, 36%, 13.5%, and 12.5% of GDP, respectively.

North America – consumers are the biggest beneficiary

The biggest beneficiaries of a low oil price in the US will be consumers, as the consequent fall in gasoline prices will effectively act as a tax cut to the American motorist. According to the US Energy Information Administration (EIA), 70% of the retail price of petrol or ‘gasoline’ is determined by the crude oil price. Average regular gasoline prices in the U.S. averaged $2.12 per gallon in January – the lowest monthly average since April 2009.

Source: Daily Fuel Gauge Report

Despite the recent shale revolution, the US is still a net-importer of oil and analysts expect that the economic benefits of increased consumer spending and falling input costs will outweigh the negative effects that a low oil price will have on the shale industry. UBS estimate that “lower for longer” oil is set to positively affect US GDP in 2015 and calculates that for each $10 drop in oil prices, US GDP rises by 0.1%.  A recent article by The Economist explains that a typical American motorist, who spent $3,000 in 2013 on petrol, might save $800 a year – equivalent to a 2% pay rise – from a $40 fall in the oil price.  Visa Inc (electronic payments) is an example of a company held in the Sustainable Future funds which is exposed to the US consumer having more money, and has performed strongly since the move in oil price.

The flip side is that the shale drillers in the US will lose out significantly, as the oil price is now lower than the marginal cost of drilling. BHP Billiton for example, is cutting back its operating US shale oil rigs by 40% following the recent slump in the oil price and the total number of rigs drilling for oil has fallen to its lowest since 2011.

The Sustainable Future funds have benefitted from being underweight the energy sector and by not having exposure to shale companies, so the negative impact that this low oil price has had on shale companies, hasn’t affected our performance.

Europe – consumers win again

Inflation in Europe, or rather the lack of it, has been attracting all the attention of late and the depressed oil price turned the inflation rate negative for the first time since 2009. Consumer prices fell 0.2% year on year in December, raising concerns that the single currency region will enter a prolonged period of deflation.

The European Central Bank (ECB) has responded by agreeing to pump money into the economy by buying government bonds in a process known as quantitative easing. The ultimate aim being that by further suppressing borrowing rates, consumers and businesses will be encouraged to stop saving and start to spend and borrow more. Such actions could continue to devalue the Euro, which is already at a nine year low against the dollar.  A weaker Euro should increase the competitiveness of European products internationally and Germany in particular, is expected to benefit from this.

The graph above shows how different sectors have performed relative to the oil price since 1995 and here are some of the stand out sectors that should benefit in a low oil price environment:

– Beverages: should benefit both from lower packaging costs and a positive impact resulting from improved consumer disposable income.

– Transportation: airlines and cruise ships should benefit from significantly lower running costs and from an increase in consumer spending.

– Pharma and Biotechnology: pharmaceuticals have performed well historically during times of falling oil prices, typically as a result of sector rotation as portfolio managers sell oil stocks and move into defensive sectors.

Asia

Lower oil prices could increase current account surpluses as well as reduce subsidy pressures on government budgets for countries who are big importers of oil. Japan and India’s net imports of oil and oil-related products equate to around 5% of the respective countries’ GDP. According to research by the Financial Times, a 30% fall in the oil price should hand back as much cash as was raised by the Japanese government in 2014 – when it put consumption tax up by 3%.

Any industry in which oil is a significant input should benefit from falling costs from a lower oil price, such as airlines. UBS estimates that fuel constitutes around one-third of airlines’ operating costs per available seat mile. The Sustainable Future funds do not invest in airlines due to their significant contribution to global carbon dioxide emissions.

Challenged sectors

The following are a selection of industries that will be under pressure from a sustained fall in the price of oil:

– Oil services, oil & gas exploration and production: low oil prices will put pressure on capital expenditure of exploration and production, which are the sole drivers of global oilfield service and drilling activity. A low oil price reduces the profitability and likelihood of projects going through.

– Aerospace: a lower oil price shifts the balance towards older aircraft as the cost benefits of buying more efficient planes is materially reduced.

– Chemicals: despite falling input costs, any industry where companies have limited pricing power tend to suffer in the long term from a lower oil price as they face significant pressure to pass these savings through to their customers.

We also see a possible tail risk in banks that have funded oil and gas companies. At current prices some oil and gas companies, those that are especially leveraged and require high oil prices to get an investment return on their assets, may struggle to repay their loans.

How the markets have reacted

The charts below show the ten biggest winners and losers since the oil price started to fall at the start of July 2014. Unsurprisingly, the Energy Equipment and Oil & Gas industries have been hit the hardest, with Airlines and Biotechnology the clear winners, having returned 31% and 27% over the six month period.

Data Source: Factset by weighted average – MSCI Global Industry Returns from 06/07/14 to 01/01/15

Further reading:

Is green the new black (or simply camouflage for business as usual)?

Integrating water into our investment decisions

Alliance Trust takes to the road to dispel myths around sustainable investment

Launch of Alliance Trust Savings platform for Blue & Green readers

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Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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