Peter and Jeff share how oil is priced into everything we do, discussing the factors influencing cost, what the political interest is and who the winners and losers are when prices are volatile. Plus, learn why you should consider maintaining insurance outside your workplace.
Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!
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Transcript:
Jeff Stolper: I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down The Middle.
It’s called many things: gas, petroleum, black gold, fossil fuel, Texas tea, rock oil or just good, old-fashioned oil. You guessed it. Today we’re talking about oil and how it impacts the stock market, the economy, and why the headlines say inflation is down, but prices seem still high.
So, in prepping for this, I was actually trying to find the oldest mainstream TV show about oil. Peter, do you know what that was?
Peter Mallouk: Beverly Hillbillies?
Jeff: Nailed it. Came out in 1962—
Peter: Literally, was it about oil? I knew it was in the song, but it’s actually about it too?
Jeff: Well, it’s the genesis for it. They find the oil, then they move to Beverly Hills. And so, it’s the start of it. So, you fast-forward to today. They’re still making hit shows about oil. It is certainly one of the most consistently necessary mainstream things for a long, long time.
And much of the market growth has been from tech in recent years, but I don’t think they were making TV shows about Silicon Valley in the ’60s. It’s interesting that we’re talking about it. It’s got a long-term relevance, but, Peter, for you, how do you view oil’s importance in the global economy today?
Peter: People tend to think about oil in a vacuum. Like, “Okay. Well, the price at the pump goes up. And so, I understand that, but why is it such a big influence on the economy?”
And think about, like, everything that we do and touch has some proximity in some way to oil. So, for example, if you go to McDonald’s and you order a Happy Meal, well, all that food got transported to McDonald’s. And oil was used to do that.
If you think about it in terms of, like, all the transportation, it’s priced into everything that we do. So if the cost of oil goes up a lot, it permeates through the economy in an inflationary way. If it comes down a lot, all of these items cost less, and, of course, that means the consumers have more money to spend when prices are lower.
It’s not just the pump. It’s all of these other aspects as well. Also, oil prices can change the winners and losers. If you have oil and you’re supplying it — there’s countries that have oil that aren’t supplying it — but if you have oil and you’re supplying it and oil prices are high, obviously, there becomes a trade imbalance that’s in favor of that country to the detriment of other countries.
So it starts to also impact where money may make the most sense to have at that moment in time in the world.
Jeff: Yeah, you mentioned in there that it can impact all sorts of things from hamburgers to how much it costs to fill up your car. But what actually impacts the price of oil? Talk through maybe the geopolitical, exploration, all of that. What factors into the cost?
Peter: The things that are, I think, obvious to everybody like how much can you find? You find more the price is going to go down. Can you extract it easily and efficiently? So as technology has advanced to allow for different types of drilling, being able to extract oil in more efficient ways, that’s obviously, helped. So, having more supply and being able to access the supply that are there, those are the everyday factors.
The other very, very big factor that, and rightfully so, gets the headlines is the oil supply is aggregated in a couple of different countries, and there tends to be disruption in all of these places. Right? In the Middle East, with Russia, with Venezuela, with the United States. There’s tension with Canada. Basically, if there’s oil, there right now is some level of unrest.
And if you get to a situation where you see production disrupted or intentionally shut down, that would, obviously, result in a significant spike in oil prices. Now a lot of people say, “Well wouldn’t the United States and other countries just use their reserves?” The reserves are for an emergency. They’re not to just make the prices be perfect all the time. They’re really to ensure that in the event of a national crisis that we’re able to supply our own oil.
So, the U.S. will still tend to hold reserves even when there’s disruption around the world.
Jeff: This is making headlines. You’re seeing Trump go into Venezuela. You are seeing, I think, the head of Saudi Aramco last week at Davos said something about oil price. Like, what is the political interest in this? Is it to keep prices low? Is it we’re getting to midterm season? What are you seeing there?
Peter: President Trump is more focused on what’s going on in the economy and market than any president … presidents obviously care about the markets. I’m just saying that Trump is obsessed with the economy. He really views … and he’s said this publicly many times, he really views himself as the pro-economy president, that anything in the way of the economy, he wants to help, and his identity is very much tied to it. He really wants to have his presidency associated with a boom in the economy and the markets and all of those things. Obviously, the verdict is out.
But a big, big factor of that is to have lower interest rates, which is why you see him hammering over and over and over again for lower rates, despite the market still being inflationary, and low oil prices, because high oil prices are a tax, and they can slow down an economy.
So, you’ve got somebody who is kind of a “by any means necessary” person in many ways that people don’t like. Some people are fans and some people are not. But he’s a “one way or another, I want oil prices to stay down” type of person, whereas I think you would see a lot of presidents, Republican and Democrat, they would be a just another factor. Right? “I can tolerate high oil prices for a while in exchange for this.” I really don’t see that in the language that President Trump has been using over the last few months.
Jeff: So, shifting this more to specifically the market, it seems as if there are winners and losers across the market as oil goes up and down. How can you tell who’s going to be a winner, who’s going to be a loser, as there is volatility when it comes to oil?
Peter: So, I would place zero bets based on what’s happening, because I think what we look at is we have a couple different trends all happening at once. We’re discovering more oil than ever, we’re finding it easier to extract the oil than ever, and we are finding alternatives to oil at a more rapid pace than at any point in history. So, you have these very big factors.
Over this short run you have potential disruption, but then you could argue some of the disruption might be actually favorable to oil prices coming down, like Venezuela is dramatically disrupted. Many people think that the whole idea of drugs and all this stuff is just a cover story for being able to start to work with Venezuela with an administration that will allow U.S. companies in. Right? And we saw that in the first week. President Trump had all the oil CEOs at the Oval Office to talk about partnering with Venezuela’s new leadership on production.
And at the same time you’ve got places that probably won’t get better any time soon, like in the Middle East. And so this is a market where I would not bet on winners and losers at all. Just something to be aware of, can result in short-term market volatility.
Jeff: As part of a diversified portfolio then maybe you do have exposure to some commodities, you do have exposure to oil, to things like that, and oil companies have been on the New York Stock Exchange and traded for a long, long time. I think one of the oldest still-listed companies on the New York Stock Exchange is a gas company, Consolidated Edison.
And it’s certainly not going anywhere. So, as we think about the next year, the next decade, whatever it may be, thinking of those oil companies in a portfolio, what should the exposure look like? And how should someone factor it in?
Peter: I think it should look as if it was indexed. So, Creative Planning clients, they have indexes. Like, for large U.S. stocks they’re on the S&P 500, well, you now own ExxonMobil and other big oil companies, and your exposure, I think, is right where it’s supposed to be.
The second that you leave that philosophy and you say, “I’m going to buy more oil,” or, “Tomorrow I’m going to buy more tech,” you start to play a timing game on when which sector will do better than another sector, and there’s just overwhelming evidence that that results in higher fees, higher taxes, those parts are certain, but the follow-on part is an extremely high probability of under-performance.
Jeff: Peter, let’s move to our tip of the month. What do you have for us?
Peter: So, my tip of the month is if you have your life insurance through work, be very careful that your financial plan can withstand what would happen if you lost that insurance. So, for example, let’s say that you’re sitting with somebody to build a financial plan. And we’re looking and we’re saying, “Okay. This couple needs a million dollars of term life insurance to cover the next 20 years.” So, if the breadwinner passes sometime in the next 20 years, the family needs that million dollars to be able to pay for the kids’ education, to make the payment on the home or pay off the home, and to make sure that the family’s lifestyle can be maintained.
So, someone might say, “Well, the term life insurance policy at my job costs $100 less than going and getting my own term policy. I’m going to do that.” The problem with that is most jobs are not permanent. People decide they don’t like jobs, companies go out of business, companies make changes. And so, if you’ve got a million-dollar term policy through work, and it meets all your needs, and then you switch jobs or lose your job, say, three years later, you will now have to go to the marketplace to get that coverage.
Two problems: one, the coverage will be more expensive, because you’re older, and the other major issue is you have to still be insurable. If you have some life event that has happened, you might not even be able to buy the insurance, or it might be extremely expensive. Don’t make your family’s needs dependent on your current job. Make sure you have term insurance that covers your need independent of work.
Jeff: That’s aligned with mine too. I do think there’s an over-reliance on employer benefits as it relates to life and disability insurance. So, I was actually going to touch on disability insurance, and I was going to make this funny joke of tying it in with land man and the oil show, and all these people that get injured while they’re on the job, but I don’t want that to detract from the importance of making sure you have enough disability coverage.
If something were to happen to you … And this is only available to those that are still actively working. So, if you’re actively working and you’ve got a great paycheck coming in, maybe every two weeks or twice a month or once a month, imagine what life would be like if you became disabled, you were no longer able to work in your job, and that paycheck went away. You likely do have some kind of employer benefit that provides you disability insurance in the unfortunate event that occurred, but I bet it is a smaller amount than you think.
My tip this month is to make sure you go in, double-check the benefits that you have as it relates to long-term disability coverage and short-term disability coverage, and see what it’s like. Do you need supplemental or additional disability insurance in the event something were to happen to you to make sure that your family is still going to be okay? You can still make your home payment, you can still pay for your insurance, you can still pay for those groceries.
Peter: Yeah, that’s really good advice, because most people’s best asset is their ability to earn. So they do a plan, “Oh, I’m going to put money here for my kids’ 529 college plans, I’m going to put money here for retirement, I’m going to put money here for my kids’ wedding,” but all of that “put money here” stuff is dependent on you being able to earn. And so, making sure that you’re covered there, whether through work or through other coverage, is key.
Jeff: Yeah. Great idea. Life insurance, disability coverage, make sure you’ve got both. Thank you for being with us today. I’m Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and we are Down the Middle.
Disclosure: This show is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels.
