We’re Not the Only Ones Dependent on Oil

Increases at the gas pump When you see the price of oil go up or down and think about filling your gas tank, you’re not the only one watching intently. The ever-changing price of oil has ramifications far beyond the cost of petrol.

The price of oil has dropped more than 8% in a couple of days, to below the $80.00 mark, having since recovered a bit. This new lower price may mean lower prices at the pump, which would be a good thing for all of us. And declining oil prices can also have positive ramifications on companies such as airlines and trucking firms (as the cost of fuel is one of their largest expenditures). There are, however, many companies (and by extension, many stocks) that may be negatively affected by the change.

There are publicly traded companies that are involved in the entire process of getting the oil from the earth to the consumer — from drilling and production names to transporters, to refiners, and finally to the sellers of oil and oil-based products. They all have their place in the proverbial food chain and all are sensitive to changes in oil prices.

If we start first with getting the oil from the earth, you have different ways of harvesting it. The most expensive and not as common method is the Canadian oil sands production, which costs about $70-$80 per barrel just to produce. Deep Water drilling – the process used in the BP Deepwater Horizon rig disaster last month – costs about $50-$60 per barrel.

Then there are the oil-producing countries, pulling directly from the ground on land. In the Middle East, the raw cost to produce a barrel of oil is around $20-$30, but many of these countries (other than the U.S.) subsidize social programs and offer other benefits to citizens, directly from production, so their “real” cost is likely closer to $55 per barrel.

As the price of oil drops, programs like oil sand refining and Deep Water Drilling become less viable, which is part of the reason companies like Suncor Energy SU, who develops and mines the Canadian oils, and Transocean LTD RIG, who has large exposure to deep-water rigs, may see their stock prices drop as well. The Deepwater Horizon was leased by BP from RIG.

Viability of alternative energy sources like solar power and wind power may also negatively affect the prices of stocks in those sectors. Some publicly-traded companies in this arena include First Solar FSLR, which manufactures solar panels, and Vestas Wind Systems VWDRY, the largest global supplier of wind turbines.

So remember that even though you might save a couple of cents at the pump, stocks in your portfolio could be experiencing losses due to the same drivers. Be sure you are aware of any correlations your stocks may have to the price of crude oil.

Photo Credit: Futureatlas.com

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