The future of oil: what do falling prices mean for investors?
Just a few years ago, oil prices were soaring at $100 a barrel, with some analysts predicting a 50% drop in value. Fast forward to 2015 and $50 a barrel seems to be the new normal, with observers growing less optimistic about the industry's future by the day. This dramatic shift has sent shock waves through the energy sector, but what are the wider implications for currencies and the foreign exchange market?
Oil and the economy
Changing energy prices can affect entire economies. Canada, for example, has a floating exchange rate and relies heavily upon its oil export income, meaning that changes to fossil fuel prices often predict fluctuations in the value of the Canadian dollar. This effect is mirrored across other big oil exporters like Nigeria, Venezuela and Russia.
On the other hand, import-focused economies like Japan, which only produces 15% of the energy it needs domestically, stand to benefit from lower oil prices. One way or the other, the point stands that oil matters, and the future of the world economy is inextricably linked to the price of crude.
While oversupply is largely to blame for the current price per barrel slump, emerging green technologies have the potential to make the price dip worsen in the future.
The Scottish government, for example, has just given the go ahead for the world's largest offshore floating wind farm to be built. While this is uncommon in the global energy market at the moment, the next ten years could see similar renewable projects becoming widespread. This trend would have the knock-on effect of eroding demand for fossil fuels as investors seek to future-proof their portfolios.
How will falling prices affect international money transfer?
Oil is an inherently unstable commodity, and although renewables may eventually cause a permanent decline in per barrel values, it's likely that rising and falling fuel prices will continue to have a dramatic impact on currency values.
When falling prices are considered in conjunction with other tremors in the global financial market such as this year's Biotech crash, it can be difficult for investors to know what to do with their cash. Investors can, however, use financial instruments like 'forward contracts' to hedge their choices and cope with this uncertainty. This enables investors to lock a future cash transfer into the current foreign currency exchange rate, and effectively limit the amount that can be lost from a transaction.