Economic Impact
On net, the winners from lower oil prices outweigh the losers. In particular, the largest beneficiaries to growth are from consumption, as lower gas prices free up more disposable income for, say, holiday shopping. With a $30 drop in oil prices since August, this would add an estimated 0.2% to 0.5% to GDP from personal consumption. The impact will be felt most by the lowest income households where the additional income will have a disproportionate impact. Estimates of about a 10% decrease in capital expenditures as the energy sector reassesses economic feasibility of projects would only create a drag of about 0.1% on GDP. However, for investments in specific energy-related sectors (or emerging markets where energy or other commodity related investment represents a larger percentage of exposures), greater care will need to be exercised in looking at the specific sectoral impact.
In high yield bonds, for example, significant new investments have been made in shale gas and oil investments. Such growth in investments, fueled by debt and reflected in the significant rise in the energy sector weightings, as well as the number of new issuers, could represent significant sources of future risk. That risk, of course, depends on where oil prices ultimately stabilize.
Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog. You can find more of his posts here.