Why Consumers May Need to Get Use to $110+ Oil
April 15, 2008
Oil prices are ripping higher this morning. 24 hours after the US retail sales report told us that gasoline receipts is the ONLY reason why the value of consumer spending increased last month, today’s rise in oil leads us to wonder how much more pain can the average consumer bear?
McCain’s Proposal = 2 Big Mac Meals
John McCain has proposed a gasoline tax free summer. More specifically, he wants to cut out the 18.4 cent federal gas tax and the 24.4 cent diesel tax between Memorial and Labor Day. The savings, which is the equivalent of 2 Big Mac meals will help the average US driver, but not by much.
Oil prices hit an all time record high above $113 a barrel this morning and here are just 2 reasons why US consumers may need to get use to oil prices at or above $110 a barrel:
1) Oil Supplies are Dwindling
When the world’s largest oil producer is reporting declining production, you know that the world’s oil supply is in trouble. For the first time in 10 years, Russia’s oil output has fallen. There have also been disruptions in oil production across the globe. Mexico for example closed its 3 export terminals due to bad weather while production at Shell’s Calpine pipeline has been temporarily disrupted. Troubles continue to brew Nigeria while Italy’s Eni SpA facility has been hit by sabotage. Although these are temporarily, these temporarily disruptions tend to happen frequently
2) Don’t Count on OPEC to Boost Production
OPEC refuses to boost production and bring some relief to oil prices. In the face of slowing growth, OPEC wants to capture as much profits as quickly as possible. The weakness of the US dollar is also cutting into their cushy profits and for these reasons, they will hold off increasing production for as long as they can.
What does this mean for Currencies?
The Canadian dollar has decoupled from oil prices so we do not expect the CAD to benefit from the rise in crude. Instead the biggest consequence will be on the monetary policies of central banks around the world:
For the UK, who just reported the fastest growth of producer prices in 17 years, the further rise in oil prices will force the Bank of England to be less liberal with rate cuts.
For the Eurozone, don’t expect ECB President Trichet to back off his stubborn focus on inflation. In fact, this only supports my belief that the EUR/USD will hit a new all-time high above 1.60.
For the US, this all means more trouble for the US consumer and US corporations who are crippling under the weight of higher fuel costs.
Posted in Bank of England, ECB, Federal Reserve, Oil, euro record high
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April 15th, 2008 at 10:20 pm
I am surprised that even an expert forex trader like Kathy Lien falls into the trap of the commodity trade. There is no shortage of oil, nothing at all like in the seventies when cars were lining up at gas stations. I also do not buy into the commodity traders dogma that everything has changed and people in China are suddenly waking up to the amenities of good food and combustion engine driven movement. All this is happening since the arrival of an oil friendly administration in the White House. The news out of Russia today is most likely nothing but hot air as so many other related stories in the last couple of years. I wonder why the big news out of Brazil, the possible discovery of the largest oil field in thirty years, did not get the same attention in the trading pits? What’s more, half of the world’s recoverable oil reserves are shut down either because of war or political sanctions or nationalization. In addition new technologies in deep water drilling open up the possibility of new major oil finds under the ocean floor. Improvement in conservation in industrialized countries will soon more than make up for increased demand from China and India. As every chart technician can tell the recent spike in oil prices (from about 70 to now 113) is a direct result from the weakening USD and absolutely nothing else. If the US economy is not collapsing and permanently impaired then there is reason to assume that the USD is undervalued and will change course in due time.