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3 Industries Affected by Oil Prices

Oil is perhaps one of the most important commodities of this generation. It is used as transportation fuel, for heating and electricity generation, as well as for making chemicals and synthetic materials. It, therefore, comes as no surprise, that a small change in oil price can have a ripple effect on multiple industries. Even in Singapore, there are many companies that are affected by oil price fluctuations.

As oil price is expected to rise again this year, I thought it would be useful for investors to be aware of some of the industries that are most intricately affected by a change in oil price.

Airlines

Airlines require an exorbitant amount of transportation fuel. A small change in the price of oil will, unsurprisingly, have a large impact on their overall cost. For instance, according to the International Air Transport Association, the low cost of fuel in 2015 saved the world’s airlines US$89 billion.

Other end users of oil like shipping and transportation companies are also reliant on oil and any changes in oil price will have an impact on their operational costs.

Companies related to oil production

Singapore is home to two of the biggest oil rig builders in the world. They are largely dependent on the oil economy for business. In periods of low oil prices, companies may slow down oil production as it becomes less profitable.

For instance, in 2015, when oil prices plummeted, these two large Singapore companies suffered major slowdowns to their business. Smaller players will arguably suffer even more as they may not have the financial muscle to tide them through such a challenging period. It was, therefore, not surprising to see many oil and gas related companies file for bankruptcy during that period.

Businesses related to oil substitutes

The palm oil business is an example of an oil substitute that can be affected by oil prices. When the price of oil is low, the demand for oil substitutes decrease and can negatively affect the palm oil business.

We can take 2014 and 2015 as examples. The price of oil fell dramatically during that time. This was bad for the palm oil industry, which suffered due to the lower demand for palm oil.

The Foolish bottom line

Oil prices can have a snowball effect across multiple industries. As the oil price is expected to increase again this year, investors can look at companies that will be positively impacted by this rise.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.