Why Cheap Oil Is Good For Us

You know, I’m getting a bit sick of listening to investors whining about the price of oil.

Sure, its bad news for those who own shares that are plummeting as a result (and I have some Premier Oil shares for my sins), but the rest of the economic world is benefiting greatly from this prolonged period of cheap energy supplies.

And though the UK has plenty of oil production of its own, we’re still a net importer of the stuff, and cheaper just has to be better overall.

In fact, in an interview with the BBC, deputy Bank of England (BoE) governor Dr Ben Broadbent has said the fall has been a “net good” for the UK economy, with real wages having risen 7% over the past couple of years — the fastest growth rate in 15 years. According to Dr Broadbent, and what should really be quite obvious to most of us, cheap oil has helped keep prices down across the economy and has provided a boost to consumption.

Recession receding

The BoE has cut its economic growth forecast for this year to 2.2%, from the 2.5% it was predicting in November, but that’s still a long way from the recession that is looking increasingly distant in the rear-view mirror — and we’d surely be seeing a lower figure had oil prices not considerably weakened.

And what helps us in the UK helps the rest of Europe even more. The eurozone is finally away from recession and back to economic growth — very modest, and still a victim of the fundamental mistake that is the single currency in the first place (though that’s perhaps for another day), but it’s progress nonetheless and it’s been helped by cheap oil.

And what about the Chinese slowdown that we’re all supposed to be so scared of? Well, cheaper oil is going to help that net importer too, and should soften the blow of slowing economic growth. (It’s easy to blame sluggish Chinese demand for the fall, but the reality is that it’s been driven by over-production more than anything.)

What does that mean for UK investors? Well, for me it’s another sign that we’re in for a continuation of the stock market progress that has led shares to beat other forms of investment hands down for more than a century, and I really can’t see the current pessimism lasting for much longer — and in another decade or so’s time, the oil-led blips will barely register on the long-term chart of the FTSE 100.

What shares?

Individual shares? Well, those that benefit directly from increased consumption should benefit the most, so perhaps it’s time to get into the retail sector? And maybe the housebuilding sector, which is still looking cheap to me. And the better financials too, like Lloyds Banking Group, Barclays, and the FTSE 100’s top insurers?

There are plenty of companies benefiting from cheap oil — but the irony is, it might take an oil recovery before investors can put aside their irrational fears and make the most of it.

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Alan Oscroft owns shares in Premier Oil and Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.