DollarsAndSense explores how declining oil prices will affect Singaporeans. In part 1, we explored the impact of oil prices on transport prices, holiday expenses and consumers. Now, in part 2, we will look at how the volatile oil prices have impacted property prices, investors and the general Singapore economy.
In fact, oil prices had become even more erratic with fluctuations at the $50-mark since part 1 was published. We don’t know where it is headed, but we do know that it has affected the global economy and businesses.
Property Prices
Logically, we don’t expect property prices to mimic the rises and falls in oil prices. Historically, however, there is a relationship between oil prices and property prices – they rise and fall together. We think this could be caused by another relationship entirely. Consumption of oil rises in times of economic growth, thus increasing oil prices. People also buy more properties in times of economic growth, and as a result, property prices thereby increase. So the underlying factor is economic growth.
What is likely to be happening now is a relatively calm phase of economic growth, but an oversupply of oil. This has caused oil prices to slump but should not impact property prices too drastically. However we do see a slowdown in property prices – this can be explained by the several rounds of government cooling measures that have been implemented in recent years instead of the result of falling oil prices.
Stock Investors
On the idea that lower oil prices could stimulate spending, investing in the equity markets may be a good idea after all. Of course, the companies that are in the oil and oil-related industries may suffer in the short-term as projects are canned and an equilibrium price is found.
The next thing for investors to consider is whether there is a bottom for oil prices. With the cost of extraction ranging from $27 to $75, it is logical to think that prices will not fall below it. And also logical to think that production will stop at uneconomical oil wells, which will reduce overall supply and perhaps have a positive impact on prices. That as the basis of our logic, we are of the opinion that it is always a good deal to buy anything at close to its floor price when you see upside potential. Note that we cannot say for sure what the floor price is, so don’t blame us if you get burned in some trade you made with the same logic we had. If we could predict stock prices accurately and consistently, we wouldn’t be here writing these articles.
General Economy
Low oil prices can have a positive impact on the economy in Singapore. Being a trade dependent country with complete reliance on imported oil, the country should benefit from the lower oil prices, allowing households greater spending power and lowering costs for businesses. This should in turn spur the economy on.
Singapore is also a large refinery centre for oil and oil-related companies on Jurong Island as well as an export-dependent economy. Plunging oil prices could signal a slowdown in global growth which may pose a risk to Singapore’s economy.
In Summary
The verdict is not out on how drastic the plunge in oil price will hurt the broader economy. We don’t think oil prices have adversely impacted Singapore too much yet, and there may even be reasons to cheer. Of course, everyone will need to be wary of the direct impacts on companies in the oil and oil-related industries.
Image from Atlantic Sentinel. Used with appreciation.
