Despite the tremendous advancements made in eco-friendly technologies like solar and wind power, hybrid, and electric automobiles, our society – at least for the time being – is still extraordinarily dependent on fossil fuels to maintain our standard of life. Of course, the most important of those fossil fuels is crude oil, as it is needed for nearly every facet of modern society.

However, although the price you pay at the pump for gasoline when you fill up your car might be the most direct example of the impact of oil on your money, there are a whole host of more indirect costs that also impact your pocketbook. In other words, oil affects your finances in ways that you might not be aware of daily.

Transportation Costs

Just like the unleaded gas you use in your car, the vast and intricate network of delivery trucks that bring the products you rely on to market also depends on fossil fuels. Therefore, when the price of fuel rises at the pump, it not only affects what you are paying for gasoline in your car but nearly all of the goods and services you use on a daily basis as well.

Manufacturers, distributors, and shipping companies must maintain as healthy of profit margins as possible to stay financially viable. To that point, when the price of fuel rises, those higher costs are more often than not transferred to the consumer in the form of higher price points for goods and services rather than absorbed by a company’s profit margins. As the price of fuel rises, it acts as an inflationary force across the entire economy that ultimately results in you, as the consumer, losing purchasing power on your money.

Oil and Your Investments

Although a bit of contention remains over the correlation between the price of oil and stock prices, it’s safe to say that rising oil prices will have at least a minimal effect on stocks as they can erode corporate profitability. However, the correlation between the two likely isn’t as strong as most might suspect since several other factors also help determine where stocks trade on any given day.

Rather than seeing oil as a direct and substantial driver of the asset prices within your portfolio, however, viewing oil as an economic indicator probably provides significantly more insight into short and long-term asset performance. Since the price of oil is primarily determined by the fundamental laws of supply and demand (at least when excluding any price inefficiencies that monopolies have created), a drop in the price of oil might help you at the gas pump and ease transportation costs for the products you rely on, but can also indicate a weakening economy.

The Bigger Picture

When oil prices are low, it typically means there is an excess supply, which is indicative of sluggish industrial production. Likewise, rising oil prices are – as previously mentioned – inflationary and can signal a rapidly growing economy. In other words, depending on the direction it’s moving, the price of oil can be both a positive and a negative for your money. It can act as a direct influence at the gas pump or as an economic indicator that speaks of the direction the economy might be heading. Therefore, it can affect your investments as well.

Have questions about the impact fossil fuels can have on your portfolio or how to divest from them altogether? Need help with your financial plan? We’re here to help! Simply click here or call (763) 445-2772 to schedule a complimentary consultation today.