Wednesday, May 04, 2011

Three Graphs that tell the Energy Story

Only in the last few month's did I begin to recognise a high correlation [high as in 100%] between local and overall stock market fluctuations, and energy prices.  Specifically an increase in the JSE or the DOW [lately these are also increasingly in sync] would see increases in the dollar price of oil.  Lately, the movements have not only become locked, but energy fluctuations are proportionately higher in each instance.  In other words, a 1% increase in world stock markets is increasingly creating much higher percentage increases in energy prices.  In other words, if energy prices are proportional to overall stocks, and proportions are increasing, then energy has become the ultimate game changer.  It was bound to happen sooner or later, well it appears to be happening sooner.

The graph below shows the world's largest energy company, EXXON MOBIL [in blue] plotted against the DOW industrial average [in red].  The comparison goes back 41 years.  Notice that in 1980, the lines begin to diverge gradually, and by 2005, identified by some as the year global production of liquids peaked, the proportion of EXXON's inexorable rise relative to the DOW had increased substantially.  Notice too how rapidly that rate continues to increase, and that over the full duration of the comparison, both lines remain very clearly in-sync.
You might be thinking that since average share prices show what the average share is doing, that any share [and every share] matched against the average share price should be correlated.  Of course we know that any number of companies go bankrupt in a given year, and thus their share prices are removed from stock exchanges.  Also, not every share is an EXXON.  Exxon is the largest of the six oil majors, and the largest company in the world.  Second is a company called PetroChina.

Below is a graph of Google against the Dow. Other than the slight bump in the middle the correlation is far less than EXXON, although both indices seem to be moving in broadly the same direction.  Is this true for all shares after all?

Below is the graph for General Motors, a company that is also one of the world's largest, and incidentally, uses much of the product from EXXON.  There appears to be no correlation to this company.  GM incidentally enjoyed a government bailout after 2008, which does not seem to have improved the downward trajectory of the share significantly. 
What is the lesson to learn from these graphs, and the knowledge that energy prices are correlated to overall share prices? Simply that we need energy in order to grow, and that energy prices are what turn our fortunes around. Also, if there is money to made in an expanding economy, energy shares are always going to be the most reliable. Until the money that buys them no longer has any value.

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