Risk of Stagflation Increased by Oil Cartel’s Production Cuts


Oil prices have spikes significantly and OPEC is the main catalyst behind this – cutting production more than what markets had expected. This is a challenge to oil consuming countries when it comes to economic forecasting as OPEC’s decision points to a long-term positive of the oil age slowly ending.

However, in the short term, this poses a threat to the economy. There are two facets to this. Firstly, consumers and companies will see their costs sky-rocket as it directly impacts their income and spending power. Similarly, the costs of production for all kinds of companies (even those not directly related to oil) will be affected with a resulting impact on inflation.

Furthermore, the US no longer has access to its emergency oil reserves (the Strategic Petroleum Reserve) which were set up in 1975 as way to counter market volatility. This could add up to an interesting dynamic in the next few years.

John Stepek is the host of Money Distilled, a weekly look at the largest stories in markets and economics, and what it all means for one’s money. In his household budget, the TAFS (There’s Always Something) category is set aside for unexpected financial troubles. And such a situation has arisen with the recent news of OPEC cutting its production. This could result in stagflation, a dangerous economic condition characterized by high inflation, economic stagnation, and high unemployment.

It is thus important to consider TAFS in the context of both personal finances and stock investments. Investors may want to consider defensively moving towards an inflation-resistant portfolio featuring energy, gold, and cash-generative companies. Additionally, markets with increasing political and geopolitical influence should be monitored carefully.

Kristine Aquino and David Goodman of UK Markets Today suggest taking a TAFS approach to financial assets, particularly towards allocating funds to assets that offer protection, redundancy, and resilience against market volatility.

Sebastian Lyons of Troy Asset Management was also recently a part of a podcast hosted by Merryn featuring this topic.

Company mentioned: Shell Plc and BP Plc. Shell Plc is a multinational oil and gas company headquartered in the Netherlands and is one of the six “supermajor” oil companies in the world. BP Plc is a global oil and gas company headquartered in London, and the fifth-largest energy company in the world.

Person mentioned: Sebastian Lyon is the CIO of Troy Asset Management and has over 25 years of experience as an investor and financial counselor. He is also the author of eight successful books and has been featured on BBC, CNN, CNBC and others.