Russia and Saudi Arabia Plan Extended Oil Cuts
The Wall Street Journal reported on May 15 that Russia and Saudi Arabia issued a joint statement indicating that they will continue cuts in oil output until March 2018. The stated goal is to reduce supplies so prices will rise. The immediate result was an increase is world oil prices. Crude oil prices in the U.S. rose 2.1% to $48,85 per barrel. OPEC and a coalition of oil producers have tried to impact oil prices by reducing oil supplies. Renewed oil production in the Unites States from shale has hindered efforts to raise prices. In the coming weeks, OPEC is scheduled to meet and they too are expected to continue production cuts. Higher crude oil prices push U.S. gasoline prices higher, so there is a clear impact on drivers and the U.S. economy. Also significant is the impact of higher prices on the Russian economy. Recent price increases have likely helped lift Russia’s economy out of a recession. Oil and gas is responsible for more than a third of Russia’s federal revenue. Remember 2008 and the financial crisis? Russia’s finances were severely impacted by the crash in oil prices and this correspondingly impacted Russian military spending. While Russia always strives to continue funding military modernization, low oil prices tend to slow the pace. Promoting low oil prices may actually serve as a means of promoting U.S. national defense. It doesn’t require the deployment of solders or the use of arms. Money spent searching for oil and gas in the U.S., developing renewable energy sources and clean coal technologies would promote jobs, tax revenue and grow our economy. Even if the impact on Russian military spending is small, there is no loser in the United States. The impact on oil producing nations that tolerate or promote terrorism would likely be significant. Low oil prices would serve as an additional tool in the fight against ISIS. Berkshire Hathaway Bites More of Apple and Deletes IBM Stock Berkshire Hathaway, the company run by Warren Buffett, announced that it increased its investment in Apple by more than 50% in the first quarter. It now owns 129 million Apple shares. Buffett indicated the it he understands the consumer products Apple sells. During the last quarter, Berkshire sold its IBM investment. Buffett indicated that his initial evaluation of the company was wrong. For those who study and imitate Buffett’s investing philosophy, both actions provide some insight. Buy stock when you sufficiently understand the company’s business. For years Buffett shunned investments in technology companies. He feels Apple’s business is now well-defined. Buffett also seeks well-established companies that are leaders in their field. Apple’s sustained ability to produce record amounts of cash puts the company in a position to lead for many years to come. He also prefers companies that pay dividends. Apple pays more in total dividends than any U.S. company. It is well documented that Buffett’s favorite holding period is forever. He is a long- term investor. The IBM sale indicates his rationale for selling. When the investment has changed or you find you erred in your initial analysis, it is time to sell.
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AuthorFrank Longo, MBA, CPA is Assistant Professor of Business at Centenary University's School of Professional Studies. He teaches Accounting and Finance at both the graduate and undergraduate levels. ArchivesCategories |