Michael Zezas: The Macro Impacts of Oil Prices

With the rising cost of oil comes concerns around economic growth, but the distinction between the impact in Europe and the US is important, presenting both challenges and opportunities for investors.

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Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets.

It's Wednesday, March 9th at 1:00 PM in New York.

This week, the United States closed its markets to imports of Russian oil as another measure in its response to the invasion of Ukraine. In anticipation of this announcement, the price of oil increased to as high as $129 per barrel, leading the average gas price in the United States to reach $4.25. Understandably, this has created a new burden for consumers and also has investors concerned about the macroeconomic impacts of higher fuel prices. Here’s the latest thinking from our economists.

We expect the downside to economic growth to be felt more in Europe than the United States. Unlike the US, Europe is a net importer of energy, which means when fuel prices go up they have to pay the price but don’t earn the extra income from selling fuel at a higher price. Accordingly, our European economics team has revised down their expectations for GDP growth by nearly 1% for 2022. The impact in the US should be more muted, with our colleagues dropping their growth forecast by 30 basis points to 4.3%. Again, this is because the US enjoys substantial domestic energy production. So while higher prices at the pump might interfere with some consumer purchases, the income from those fuel purchases will drive consumption elsewhere in the economy.

But these views aside, we have to acknowledge these conditions of elevated fuel and commodities prices drive uncertainty around the future economic and monetary impacts that markets will consider. Increasingly, clients want to discuss and debate the idea of stagflation, which is the combination of slowing growth and rising inflation, in both the US and Europe. And that sentiment could persist for some time, as our commodities research team thinks swings in the price of oil between $100 and $150 are possible in the near term.  

We’ll have a lot more on that in future podcasts, but for now wanted to point out one tangible takeaway for investors: potential upside for equities in the energy exploration and production sector. Higher prices at the pump means potential for more revenue, yet the sector is valued at a discount to the S&P 500 when accounting for its prices relative to the cash flow of companies in that sector. 

Bottom line, the global economy is changing quickly, presenting both challenges and opportunities. We’ll be keeping you in the loop on both.

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