You might think that oil is the province of reporters covering the energy industry and its companies. Not at all. No matter what area you cover, oil has some important implications. That’s because petroleum is connected in multiple ways to business and your beat in multiple ways. Here are some of them.
GDP indicator
Read commentary on the stock market and you’ll see that prices of oil—unprocessed product typically quoted as being Brent Crude from the North Sea or West Texas Intermediate—have enormous effects on stock prices. The reason is that oil, being the single most important energy source at the moment, is a proxy for economic activity.
When prices drop, it’s often because demand is less, leading investors to think that global GDP growth will slow. In turn, that affects all businesses.
Energy costs
Businesses use energy, whether it’s to power and control heating and cooling of buildings or to run industrial processes. For example, according to the U.S. Energy Information Administration, the bulk chemical, refining, and mining industries account for 58 percent of total national industrial sector energy consumption.
The more energy costs, the more expense any company faces, which lowers bottom-line profits. Energy price pressures affect all of a company’s suppliers, driving all costs up.
Also, the more erratic the numbers, the greater the difficulty a company faces in trying to predict its costs and plan for future expenses.
Material costs
It’s easy to forget that petroleum products aren’t only about energy. They also play important roles as raw materials for manufacturing in the chemical and plastics industries. These so-called feedstocks compose about 28 percent of all petroleum use in the U.S. Availability and price of petroleum affects how much the finished products cost.
There’s a direct effect on companies in those industries. But there are secondary implications for every other industry. Office products, equipment, and so much more are made with chemicals and plastics. You can’t escape them until you manage to create the first completely virtual corporations with no one using any physical assets of any sort.
Geopolitics
Finally, politics may be a topic for political reporters, but on a global scale is affects all businesses. Oil becomes a tool used by countries in their disagreements. Anyone who doubts about what can happen might read about the 1973 oil crisis.
In a less truculent form, nations in the Middle East not only tussle over production levels in an attempt to affect supply and, therefore, prices. The countries also use oil as a way to influence the politics of their region and to strengthen or weaken alliances with nations around the world.
It all comes down to multiple ways that companies in any industry can find themselves tied to the comings and goings of the oil industry. The more you understand the dynamics, the greater your insight into what affects the companies you follow will be.
