The US economy ebbs and flows with the oil industry. Then again, most economies behave similarly — which means you need to watch the oil industry because it affects every part of your portfolio. Here are five big reasons why that’s so:
1. Oil Indicates How Much Everyone Is Traveling
The oil industry changes every day based on how traders buy and sell, how much oil is in production, and if oil production numbers will change. State economies often expect tax dollars to rise and fall based on oil sales. When oil sales rise and fall, the state’s revenue rises and falls.
Choose the most popular travel periods throughout the year, and you can be sure that oil prices are rising. Christmas, New Years, Spring Break, Memorial Day, Labor Day, and Thanksgiving are popular holidays for travel. You can be certain that oil prices will rise during this time. Yes, gas prices are lower at the pumps, but the price of oil worldwide jumps because most people around the world are traveling during these seasons.
2. The Economy Shifts as Gas Prices Change
Make sure you watch the economy as gas prices change. An economic nexus is defined as the sales tax rate for certain items that are sold in multiple states. These large companies must pay taxes back to the state when selling fuel or oil, and they send these payments to the government at least once a month. Because of this, the state or local government has an influx of cash during the busiest travel periods.
As travelers move through the area, you will notice that other local businesses tend to flourish at the same time. The economy grows because more travelers spend their money. For example, a fast-food franchisee right off a major highway will make a lot of money when everyone is traveling. When travelers do not pass through the area, that franchisee is making less money.
Companies that see their business increase often must hire for the busiest times of the year. More people have jobs, and there is more money flowing through the local economy. If you watch the stock market, you will see a different picture.
3. Many Industries Use Petroleum
Petroleum helps a range of industries operate from plastics to airlines, bus companies, and manufacturers. When oil prices rise due to demand, these industries are spending more, producing more, and their stock prices tend to increase. A company that looks as though it is growing is more attractive than a company that remains stagnant. Therefore, you must invest in companies that are popular at the moment.
You can make a bit of extra money on the stock market in the summer by investing in airlines, gas companies, and bus lines. You can make money during the holiday season by investing in companies that produce plastics, toys, and household goods.
4. Large Investment Banks Shift with Gas Prices
As the US economy shifts with rising or falling gas prices, so do large investment banks. A large investment bank has a stock that can be bought and sold just like anything else. Because of this, it is easy for the bank to make money due to heavy travel seasons. These investment banks, however, might lose money when the price of oil drops. Therefore, everyone has a stake in oil on one level or another.
If an investment bank works in a state that suffers from low gas tax revenues, the bank might suffer if it invests in a local business. Because of this, you must moderate your investments, spend on a diverse number of stocks or companies, and watch those companies rise and fall with the economy.
5. Gas Prices Put Companies Out of Business
While fuel is expensive, some investors do not realize that gas prices could put a small airline or shipping company out of business. Paying to refuel vehicles is so costly that a smaller company cannot keep up if it cannot secure a credit line to pay for fuel and keep the fleet moving. While you watch the oil industry, you must also watch large businesses that cannot keep up with their fuel costs. This tiny indicator might let you know when to sell a stock or get out of an investment before the company folds.
You can invest with confidence if you are watching the oil industry and ensuring that you know how much prices are changing. Every part of the US economy moves with the oil industry from simple economic nexus tax laws to large businesses that spend millions on fuel every month. You do not need to invest in the oil industry to be affected by the oil industry.
Photo Credit: Maartin Heerlien