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.
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.
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
2017 Was the Most Expensive Year Ever for U.S. Natural Disaster Damage
Devastating natural disasters dominated last year’s headlines and made many wonder how the affected areas could ever recover. According to data from the U.S. National Oceanic and Atmospheric Administration (NOAA), the storms and other weather events that caused the destruction were extremely costly.
Specifically, the natural disasters recorded last year caused so much damage that the associated losses made 2017 the most expensive year on record in the 38-year history of keeping such data. The following are several reasons that 2017 made headlines for this notorious distinction.
Over a Dozen Events With Losses Totalling More Than $1 Billion Each
The NOAA reports that in total, the recorded losses equaled $306 billion, which is $90 billion more than the amount associated with 2005, the previous record holder. One of the primary reasons the dollar amount climbed so high last year is that 16 individual events cost more than $1 billion each.
Global Warming Contributed to Hurricane Harvey
Hurricane Harvey, one of two Category-4 hurricanes that made landfall in 2017, was a particularly expensive natural disaster. Nearly 800,000 people needed assistance after the storm. Hurricane Harvey alone cost $125 billion, with some estimates even higher than that. So far, the only hurricane more expensive than Harvey was Katrina.
Before Hurricane Harvey hit, scientists speculated climate change could make it worse. They discussed how rising ocean temperatures make hurricanes more intense, and warmer atmospheres have higher amounts of water vapor, causing larger rainfall totals.
Since then, a new study published in “Environmental Research Letters” confirmed climate change was indeed a factor that gave Hurricane Harvey more power. It found environmental conditions associated with global warming made the storm more severe and increase the likelihood of similar events.
That same study also compared today’s storms with ones from 1900. It found that compared to those earlier weather phenomena, Hurricane Harvey’s rainfall was 15 percent more intense and three times as likely to happen now versus in 1900.
Warming oceans are one of the contributing factors. Specifically, the ocean’s surface temperature associated with the region where Hurricane Harvey quickly transformed from a tropical storm into a Category 4 hurricane has become about 1 degree Fahrenheit warmer over the past few decades.
Michael Mann, a climatologist from Penn State University, believes that due to a relationship known as the Clausius-Clapeyron equation, there was about 3-5 percent more moisture in the air, which caused more rain. To complicate matters even more, global warming made sea levels rise by more than 6 inches in the Houston area over the past few decades. Mann also believes global warming caused the stationery summer weather patterns that made Hurricane Harvey stop moving and saturate the area with rain. Mann clarifies although global warming didn’t cause Hurricane Harvey as a whole, it exacerbated several factors of the storm.
Also, statistics collected by the Environmental Protection Agency (EPA) from 1901-2015 found the precipitation levels in the contiguous 48 states had gone up by 0.17 inches per decade. The EPA notes the increase is expected because rainfall totals tend to go up as the Earth’s surface temperatures rise and additional evaporation occurs.
The EPA’s measurements about surface temperature indicate for the same timespan mentioned above for precipitation, the temperatures have gotten 0.14 Fahrenheit hotter per decade. Also, although the global surface temperature went up by 0.15 Fahrenheit during the same period, the temperature rise has been faster in the United States compared to the rest of the world since the 1970s.
Severe Storms Cause a Loss of Productivity
Many people don’t immediately think of one important factor when discussing the aftermath of natural disasters: the adverse impact on productivity. Businesses and members of the workforce in Houston, Miami and other cities hit by Hurricanes Harvey and Irma suffered losses that may total between $150-200 billion when both damage and sacrificed productivity are accounted for, according to estimates from Moody’s Analytics.
Some workers who decide to leave their homes before storms arrive delay returning after the immediate danger has passed. As a result of their absences, a labor-force shortage may occur. News sources posted stories highlighting that the Houston area might not have enough construction workers to handle necessary rebuilding efforts after Hurricane Harvey.
It’s not hard to imagine the impact heavy storms could have on business operations. However, companies that offer goods to help people prepare for hurricanes and similar disasters often find the market wants what they provide. While watching the paths of current storms, people tend to recall storms that took place years ago and see them as reminders to get prepared for what could happen.
Longer and More Disastrous Wildfires Require More Resources to Fight
The wildfires that ripped through millions of acres in the western region of the United States this year also made substantial contributions to the 2017 disaster-related expenses. The U.S. Forest Service, which is within the U.S. Department of Agriculture, reported 2017 as its costliest year ever and saw total expenditures exceeding $2 billion.
The agency anticipates the costs will grow, especially when they take past data into account. In 1995, the U.S. Forest Service spent 16 percent of its annual budget for wildfire-fighting costs, but in 2015, the amount ballooned to 52 percent. The sheer number of wildfires last year didn’t help matters either. Between January 1 and November 24 last year, 54,858 fires broke out.
2017: Among the Three Hottest Years Recorded
People cause the majority of wildfires, but climate change acts as another notable contributor. In addition to affecting hurricane intensity, rising temperatures help fires spread and make them harder to extinguish.
Data collected by the National Interagency Fire Center and published by the EPA highlighted a correlation between the largest wildfires and the warmest years on record. The extent of damage caused by wildfires has gotten worse since the 1980s, but became particularly severe starting in 2000 during a period characterized by some of the warmest years the U.S. ever recorded.
Things haven’t changed for the better, either. In mid-December of 2017, the World Meteorological Organization released a statement announcing the year would likely end as one of the three warmest years ever recorded. A notable finding since the group looks at global land and ocean temperature, not just statistics associated with the United States.
Not all the most financially impactful weather events in 2017 were hurricanes and wildfires. Some of the other issues that cost over $1 billion included a hailstorm in Colorado, tornados in several regions of the U.S. and substantial flooding throughout Missouri and Arkansas.
Although numerous factors gave these natural disasters momentum, scientists know climate change was a defining force — a reality that should worry just about everyone.
How to be More eco-Responsible in 2018
Nowadays, more and more people are talking about being more eco-responsible. There is a constant growth of information regarding the importance of being aware of ecological issues and the methods of using eco-friendly necessities on daily basis.
Have you been considering becoming more eco-responsible after the New Year? If so, here are some useful tips that could help you make the difference in the following year:
1. Energy – produce it, save it
If you’re building a house or planning to expand your living space, think before deciding on the final square footage. Maybe you don’t really need that much space. Unnecessary square footage will force you to spend more building materials, but it will also result in having to use extra heating, air-conditioning, and electricity in it.
It’s even better if you seek professional help to reduce energy consumption. An energy audit can provide you some great piece of advice on how to save on your energy bills.
While buying appliances such as a refrigerator or a dishwasher, make sure they have “Energy Star” label on, as it means they are energy-efficient.
Regarding the production of energy, you can power your home with renewable energy. The most common way is to install rooftop solar panels. They can be used for producing electricity, as well as heat for the house. If powering the whole home is a big step for you, try with solar oven then – they trap the sunlight in order to heat food! Solar air conditioning is another interesting thing to try out – instead of providing you with heat, it cools your house!
2. Don’t be just another tourist
Think about the environment, as well your own enjoyment – try not to travel too far, as most forms of transport contribute to the climate change. Choose the most environmentally friendly means of transport that you can, as well as environmentally friendly accommodation. If you can go to a destination that is being recommended as an eco-travel destination – even better! Interesting countries such as Zambia, Vietnam or Nicaragua are among these destinations that are famous for its sustainability efforts.
3. Let your beauty be also eco-friendly
We all want to look beautiful. Unfortunately, sometimes (or very often) it comes with a price. Cruelty-free cosmetics are making its way on the world market but be careful with the labels – just because it says a product hasn’t been tested on animals, it doesn’t mean that some of the product’s ingredients haven’t been tested on some poor animal.
To be sure which companies definitely stay away from the cruel testing on animals, check PETA Bunny list of cosmetic companies just to make sure which ones are truly and completely cruelty-free.
It’s also important if a brand uses toxic ingredients. Brands such as Tata Harper Skincare or Dr Bronner’s use only organic ingredients and biodegradable packaging, as well as being cruelty-free. Of course, this list is longer, so you’ll have to do some online research.
4. Know thy recycling
People often make mistakes while wanting to do something good for the environment. For example, plastic grocery bags, take-out containers, paper coffee cups and shredded paper cannot be recycled in your curb for many reasons, so don’t throw them into recycling bins. The same applies to pizza boxes, household glass, ceramics, and pottery – whether they are contaminated by grease or difficult to recycle, they just can’t go through the usual recycling process.
People usually forget to do is to rinse plastic and metal containers – they always have some residue, so be thorough. Also, bottle caps are allowed, too, so don’t separate them from the bottles. However, yard waste isn’t recyclable, so any yard waste or junk you are unsure of – just contact rubbish removal services instead of piling it up in public containers or in your own yard.
5. Fashion can be both eco-friendly and cool
Believe it or not, there are actually places where you can buy clothes that are eco-friendly, sustainable, as well as ethical. And they look cool, too! Companies like Everlane are very transparent about where their clothes are manufactured and how the price is set. PACT is another great company that uses non-GMO, organic cotton and non-toxic dyes for their clothing, while simultaneously using renewable energy factories. Soko is a company that uses natural and recycled materials in making their clothes and jewelry.
All in all
The truth is – being eco-responsible can be done in many ways. There are tons of small things we could change when it comes to our habits that would make a positive influence on the environment. The point is to start doing research on things that can be done by every person and it can start with the only thing that person has the control of – their own household.