Greater than $100 Barrel Oil & $10 gas--Economic Depression?
Oil prices swept past $75 a barrel Friday and it looks like there is no relief in sight. Could we see $100 a barrel this year? Personally, I think it’s quite possible—even probable. Could this be the catalyst for the eventual downturn of our economy? The potential is significant, as most Americans are strapped and are currently spending more than they earn just to keep their heads above water.
With consumer spending making up 70% of the US economy, what do you think will happen when people have to make difficult choices? (Choice 1) $60-120 of gas for the car to get back and forth to work this week or (Choice 2) take the family out to dinner on Friday night or (Choice 3) buying that brand new widget they really don’t need. Personally, I think it’s a no-brainer and consumers WILL pull back on their discretionary spending—to keep their cars on the road. This reduction in spending will eventually begin to drag on our economy like boots on a swimmer.
In addition, everything we buy (food, clothing, gadgets, etc) has to be transported via Air/Train/Ship/Truck/etc. As fuel cost rise, these increased transportation costs will eventually be passed on to the consumer. Can you say INFLATION?
So what is going on, why are oil prices so high?
Worldwide oil prices are up due to (1) anxiety over civil unrest in Nigeria, (2) political instability in Venezuela, (3) the fact that major oil-production facilities in the Gulf Coast are still out of commission, and (4) the looming threat of a war with Iran…
OK, I grasp oil thing, but why are gas prices so high?
The reasons for the recent run up in gas prices are many:
(1) The price of crude oil topped $75 per barrel last week.
(2) Refinery maintenance—due to Hurricane Katrina refinery disruptions, routine maintenance was delayed at many refineries to keep supplies flowing. It’s now close to peak driving season and this maintenance is severely overdue. In addition, shutdowns are also in order to allow a switch from winter to summer blends. Bottom Line: some of the largest refineries in the US are scheduled to be shutdown soon. When these shutdowns do happen, US gas inventories will decrease.
(3) Switching from MTBE to Ethanol. An industry shift from methyl tertiary-butyl ether to the clean-burning gasoline additive ethanol is currently in the works because MTBE was found to pollute water supplies. This switch requires refineries to completely empty their tanks to flush out MTBE residues before they begin to use the new additive--which is in short supply. Compounding the problem: Ethanol cannot be shipped in pipelines (due to its water absorbing characteristics) and it must be trucked in to the refineries—this is increasing requirements & utilization of tanker trucks, thus reducing those available for shipping gas to local gas stations.
(4) April and May historically are peak months for fuel prices.
OK, I think I understand now, but how high can gas prices possibly go?
With Iran in the crosshairs, the Sky is the limit. If bombs start to drop, IRAN could create a chokepoint (blockade) off the Strait of Hormuz (where two-fifths of the worlds oil passes through). If this is allowed to happen, $10 + a gallon gas at the pump is not out of the question.
Would $10 a Gallon gas be enough of a shocker to throw the world into a depression?
Your guess is as good as mine, but I'd hate to find out the hard way… What do you think?