General / Expert Commentary

Fisher Investments Reviews How Oil Production Cuts Impact the Economy

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher addresses fears that oil production cuts will drive oil prices higher and subsequently impair the economy. Ken notes several reasons why these production cuts typically do not result in broad, lasting economic impact. Historically, the size of the actual production cuts generally falls short of targets, minimizing the anticipated impact on oil prices. As the world continues to become ever more energy efficient, Ken also believes small movements in oil prices have very little impact on the economy.

Transcript

So a perennial fear that pops up routinely is that OPEC-type oil cuts in production may boost the price of oil and thereby kill the economy. Or impair the economy. Now, this is one of those things that people play both ways, because on the one hand, they'll tell you when the price of energy is down, that must be a sign that the economy is weak. And on the other hand, when the price of oil is up, they'll tell you that must be a sign that the high prices of oil are going to impede the economy. And you really kind of can't have it both ways.

But let me make a point about recent headlines about OPEC cuts, particularly led by Saudi Arabia. When the kingdom announced that, you got an immediate $2 a barrel pop in the price of oil. And then it fizzled. And in fact, the price of oil, howevear you measure it now, is lower than it was then, even after those cuts in production. And the effect of that's partly, in my opinion, that often they announce the cut and size of the cut, but then the actual cuts may be a little smaller than what they talked about.

But the other part is that markets react and price this stuff really fast. They're really pretty efficient. The oil market is just a very efficient market. And the fact is today, the economy uses less oil for a dollar inflation adjusted of GDP than it did 10, 20, 30, 40, 50 years ago. We've just become much more energy efficient and little movements, little movements in the price of oil really have very little impact on the economy. So you shouldn't really worry about this.

And then using another one of my market rules, the more other people worry about it, the more you don't have to. They're doing it for you, pricing it into the market already. Just look at the price and therefore you should thank them for the worrying and worry about something that's more productive.

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