Spending

3 ways higher oil prices can cost you money

Anna-Louise Jackson@aljax7
Twenty/20

It's been a wild week in the oil market following a series of coordinated attacks in the heart of Saudi Arabia's oil industry. The international benchmark for oil jumped nearly 20% on Monday, the biggest single-day spike in history.

This year has been pretty bumpy for oil prices in general. Brent crude futures, the international benchmark, have fluctuated between about $50 and $80 per barrel in the past year. And so far this year, oil prices are up more than 17%.

Professionals on Wall Street closely monitor the change in oil prices because this commodity can have a broader economic impact. Higher energy prices often trickle down to consumers in the form of higher prices for many essential purchases — and that added expense cuts into the amount people can spend elsewhere. That said, experts say oil has to reach about $80 a barrel, or almost $20 higher than current prices, to cause a broader economic downturn.

Here are three ways that higher oil prices can affect your bottom line.

1. At the pump and when traveling

The gas pump is the first place many people think they'll pay more when oil prices spike.

While experts forecast that gas prices could increase about 20 cents per gallon in the coming weeks, the change in commodity prices doesn't always translate to an equal increase at the pump. In the past year, for example, oil prices are down about 19%, whereas the average price of a gallon of gas nationwide is down only 7% in the same time.

The relationship between oil and gas
Recent attacks on Saudi Arabia's oil fields are causing oil prices to rise. But higher commodity prices don't always lead to an equal increase at the pump. Over the past year, crude oil prices have decreased 19% while gas prices have decreased only 7%.
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kiersten schmidt/grow AAA (gas prices); FactSet (oil prices)

What you pay at the pump depends on where you live — and changes have varied even since the attacks. "We found the largest increases in Michigan, Indiana, Ohio, Illinois, and Minnesota," Jeanette Casselano, gas prices expert at AAA, tells Grow.

No matter where you live, there are steps you can take to save money when filling up your tank.

Even if you don't own a car, you could feel the pain of higher oil prices with other modes of transportation — especially when prices stay high for a prolonged period, and especially if you travel. Airlines, cruise operators, and even taxis often pass along higher costs to customers, either with fare increases or surcharges.

2. In your portfolio

When oil prices spike, you can generally expect the following to happen, as we've seen this week:

  • Stocks related to the oil industry will go up. Oil producers and refineries are most closely affected by changes in oil prices, so their stocks move higher.
  • Shares of airline and cruise companies will go down. These stocks fall because higher oil prices can cut into revenue, and there may be a delay before the companies can raise prices for customers.
  • Retail stocks may fall. Depending on the extent of the rise in oil prices, shares of retailers may fall if traders worry that consumers will have to cut back spending, and because it will cost retailers more to transport their goods.

If you own individual stocks in the above industries, you're likely to see the value of your portfolio fluctuate. If you invest in index funds that track the broader market, you'll find that the potential impact of higher oil prices is less predictable — and you may not notice much change unless there's a prolonged spike in prices.

There are periods when stocks move in lockstep with changes in oil prices. But that correlation weakens, or even becomes negative (meaning that stock prices go lower when oil prices go up), when there are large price increases in oil, according to Marko Kolanovic, global head of macro quantitative and derivatives strategy at J.P. Morgan. And he doesn't expect a meaningful impact on the stock market until oil prices reach $80 to $85 a barrel.

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How do economic cycles work?

3. At the store

You may not notice differences in prices when you're shopping right after oil prices go up, but when prices stay high for a long period of time, you could see an effect. That's because, whether you go shopping at a store or online, the goods you buy spend at least a portion of their journey on a truck, and companies must pay more for transportation.

While some retailers are able to keep prices steady and absorb higher fuel prices, others may pass along those costs to consumers — which could happen ahead of the holiday shopping season this year. But again, the key here is whether gas prices continue to rise, and stay high for a long time.

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