In a recent report, Fidelity Investments analysts took an in-depth look at fears surrounding the recent collapse in crude oil prices.
According to the report, investors have no reason to panic over the price of oil.
Fidelity analysts begin the report by running down a list of economic advantages to low oil prices. First of all, low oil (gasoline) prices, they say, are akin to a sizable tax cut for American consumers.
More disposable income means more spending in other sectors of the economy.
Low oil prices coupled with strong labor markets have produced an environment of strong economic growth in the U.S.
Related Link: Why Oil’s Crash Is Nowhere Near Over (In 7 Pictures)
Cheap oil is stoking the fires of the economic recovery.
Cheap oil means lower production costs for many American industries. For most American companies, energy is an expense that eats into earnings.
While the energy sector itself is certainly suffering from falling oil prices, analysts point out that energy makes up only 8 percent of the overall S&P 500.
For much of the other 92 percent of the market, low energy costs are a blessing.
According to the report, energy capex makes up only 1 percent of nominal GDP, and 8 percent of nonresidential fixed investment. While energy’s role in the U.S. economy is certainly important, worried investors shouldn’t over-inflate the sector’s importance.
Investors worried about falling oil prices dragging down the stock market and bringing the bull market to a screeching halt should remember this Fidelity note: The S&P 500 has historically had zero correlation with oil prices.
There are many benefits to the American economy from low oil prices.
Fidelity analysts, in particular, believe recent fears over the fall in crude are likely to do more to the velocity of the drop, rather than the magnitude of it.
The United States Oil Fund LP (ETF) USO 2.35% recently traded near $17.27.
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