In World Economy News 25/05/2015
Higher prices at the pump have resulted in sticker shock to many consumers, and in my opinion, it will only get worse, with far-reaching effects.
A couple months ago, I paid $2.50 for a gallon of gas. It cost about $50 to fill the tank, and I said something funny to my wife when I got home. I said, “Who needs to buy a Tesla and go through the hassle of plugging your car in every day when gas prices are so low?”
A couple days ago at the same station, gas was over $4 a gallon, as prices increased by over 66%, and instead of costing $50, I paid over $80 to fill up the tank. Luckily, I can afford this, and I assume most people who are invested in the market can afford an extra $30 too without breaking the bank, but for the rest of the population, the surge in gasoline prices over the past few months has become a problem.
In fact, it may have become enough of a problem to cause them to curtail spending n other places, and to be more frugal, but more importantly, to also be less optimistic. That puts consumer sentiment front and center, and we have already started to see deterioration there in the last report.
The question now is whether or not higher gas prices will hold or will they fall.
My answer reflects back on my opinion about oil prices. A few years ago, I was invited to sit down with Prince Al Waleed Bin Talal, the Prince of Saudi Arabia and one of the wealthiest men on the planet, and we talked about different investment techniques. There was plenty that was discussed, but one of the key takeaways I came away with was that the man did not like to lose, and he did not like it when his wealth was essentially at the mercy of others.
Think about that carefully. Saudi Arabia largely controls OPEC. With shale companies in the U.S. increasing supply so rapidly that oil prices fell, the wealth of OPEC nations was hit, and that caused OPEC to start to play hardball. In industry terms, that means they refused to adjust output to stabilize prices (their wealth was at the mercy of frackers so to speak). By doing so, they are purposely trying to force many of the frackers to go out of business. This is obviously hurting other countries, too, but that does not mean Saudi Arabia is happy with low oil prices.
They want oil to be much higher, and once enough of the supply is cut off — because companies who cannot afford to drill at these low prices go under — they will start to control supply again. We can foresee the back and forth fight between low-cost drillers and frackers happening for years, but the frackers are not coming to market with oil at these prices, instead they are leaving.
Many frackers are closing shop, or at least stopping production, and as that happens, supply concerns diminish. This is going to continue, and gasoline prices are therefore likely to increase even more. As that happens, consumers are likely to experience more financial concerns, and ultimately, by the end of this year, I expect the consumer to be a negative influence (more reasons than just this) on our economy, too.
My outlook s for higher oil prices, higher prices at the pump as the year goes on, and I expect consumers to feel it right where it hurts them most, in their pocketbooks.
