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High Gas Prices Could Slow Recovery



June 09, 2009 – Comments (8) | RELATED TICKERS: GAS.DL2


Yesterday I blogged about how oil has experienced its most rapid rise in more than a decade in the face of terrible fundamentals (see article: Oil has rallied faster over the past 75 days than it did during the "bubble" last summer).  After a one day break, oil's off to the races again today...up over a buck to nearly $70/barrel.

It's somewhat ironic that the fact that people are bidding up the prices of commodities like oil in anticipation of an economic recovery could actually act as a massive headwind that will slow the recovery from this recession down.  The NYT had a great article on this subject today (see article: High Gas Prices Could Slow Recovery). 

After falling off of a cliff along with oil, gasoline prices have risen for 41 consecutive days to a national average of nearly $2.62/gallon.  That's up a dollar per gallon over the course of a very short period of time...and prices at the pump are probably headed higher.  The price of gas has risen 62% since December, while the price of oil has more than doubled since then.

Here's what Yale economists Robert Shiller had to say about the recent rise in the price of gas:

"This hits everyone.  It has the potential to affect your confidence.” He said that the recent rise in gasoline prices could effectively offset the new $400 to $800 payroll tax cut most employees are receiving this year as part of the Obama administration’s effort to stimulate the economy.

According to the Oil Price Information Service last summer consumers were spending $1.5 billion per day on gas.  After the price of gas fell off of a cliff, consumer spending on gas fell to only $600 million/day.  That decrease in the cost of gas was very simulative.  Unfortunately, consumer spending on gas had risen back to around $1 billion/day again.

I have stayed far away from any consumer discretionary stocks for a long time, much to my detriment during the recent rally, but I strongly believe that the sector has gotten ahead of itself.  The consumer savings rate will likely revert to its historical norm of 9% (from 0% not that long ago) and the percentage of GDP that consumer spending accounts for will likely fall from the 70s to the mid-60s at most (again the historical norm).

Baby Boomers are repairing their crushed retirement portfolios and they have passed their peak spending years.  This is the largest generation of consumers that the world has ever seen.  Growth in the economy is going to be much slower going forward than we have become accustomed to over the past two decades.

Speaking of Robert Shiller, who's most famous for his home price index, mortgage rates have risen nearly a full point from their recent low.  Higher mortgage rates will serve as a drag on home values and consumer spending as well.


8 Comments – Post Your Own

#1) On June 09, 2009 at 1:05 PM, TDRH (96.84) wrote:

 Dollar based commodities will continue to inflate, interest rates will continue to rise to reflect inflation/credit risk.  

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#2) On June 09, 2009 at 1:41 PM, portefeuille (98.90) wrote:

It's somewhat ironic that the fact that people are bidding up the prices of commodities like oil in anticipation of an economic recovery could actually act as a massive headwind that will slow the recovery from this recession down.

That is not ironic neither is the "same" statement about "bond or mortgage yields"  and "the economy/the stock market".

These things are actually beneficial in a sense since they stabilise the system (it is called "negative feedback". have a look at this) ...

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#3) On June 09, 2009 at 3:04 PM, TMFDeej (97.61) wrote:

Hi Port.  Thanks for reading.  I appreciate your feedback, but I don't care what Wikipedia says.  In the midst of a terrible recession, the last thing that the U.S. economy...which is highly dependent upon consumr spending...needs is significantly higher mortgage rates and gasoline prices.


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#4) On June 09, 2009 at 3:21 PM, ceejayoh (40.84) wrote:

I don't have a clue why this house of cards (rally) is still standing, but Deejay, you are right in thinking that increased oil prices will add the weight needed to knock it over. One thing that leads to consumer spending in the summer is travel and recreational spending like boating. High gas prices will lead to staycations instead of vacations.

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#5) On June 09, 2009 at 4:00 PM, TMFDeej (97.61) wrote:

The potential impact of the rapid rise in the price of oil is a popular topic in the news today.  Here's another article on this subject, from CNN/Money:

$70 oil menaces budding recovery

As oil prices rise, some say already weak consumer spending is in danger of taking an even harder hit.

The I don't see how anyone can say that significantly more expensive gas won't have an impact upon the economy.  Its meteoric rise (and Goldman's manipulation of prices) last summer was one of the straws that broke the economic camel's back.

Here's a few quotes from the article:

"People say it doesn't matter until gas gets to $3 or $4 a gallon," said Peter Beutel, an oil analyst at Cameron Hanover. "But every time it goes higher it takes that much more money out of consumers pockets."

Beutel can even tell you how much. For every 10 cent rise in gas price, people can spend $40 million less a day on other things.

"We're losing opportunity every time the price rises," he said.

Most analysts say prices aren't rising because of an actual shortage, but rather because Wall Street is again retuning to the crude market.


China is using a bit more oil, but worldwide demand remains slack. The government is reporting the world's spare production capacity - the difference between what the world pumps and what it could pump and a key cushion against supply disruptions - has risen to levels not seen since 2002. Oil in storage is also near record highs.

"Crude oil prices appear to have been divorced from the underlying fundamentals of weak demand, ample supply, and high inventories," Adam Sieminski, chief energy economist at Deutsche Bank, wrote in a recent note.

The rise in prices is instead being driven by a falling dollar and investor interest.

A falling dollar is causing oil to rise as investors buy crude as an inflation hedge. Money is also coming out of bonds and other safe haven investments and back into oil, stocks and riskier assets as early signs suggest the economy may be improving.


But the price rise is coming when America is still losing jobs and budgets are still strained.

"That has to have some kind of impact on people," said Sean Brodrick, a natural resources analyst at the investor newsletter Uncommon Wisdom. "I don't know if it will kill the recovery, but it will certainly take some steam out of it."


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#6) On June 09, 2009 at 5:09 PM, TMFDeej (97.61) wrote:

Here's a couple more articles on the subject:

Relentless rise of Treasury yields could choke nascent recovery

On Borrowed Time: Consumer-Led Recovery

And this from David Rosenberg: 


U.S. retail gasoline prices are now up a full buck from the lows, to $2.62 a gallon (up 41 days in a row) — the equivalent of a $130 billion drag on discretionary spending at an annual rate. Tack on the 60bps bounce in mortgage rates too, which has triggered a near-60% collapse in mortgage refinancings. Then tack onto that the 0.2% decline in average weekly earnings in May — down now in two of the last three months — and a consumer relapse could well be in the offing and end up snuffing out this ballyhooed inventory-led recovery that has underpinned equities and undermined Treasuries over the last 3-4 months.

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#7) On June 10, 2009 at 11:11 AM, sarcaz (32.17) wrote:

Deej - so do you still see a good opportunity in UNG, and possibly DUG?

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#8) On June 10, 2009 at 11:42 AM, unvrsldeflation (62.71) wrote:

Lots of things at work in the rising price of oil. As the price goes up other countries will need more dollars to pay for the stuff. If the dollar has not gone down in value they will have a hard time. Those countries that don't have what it takes to come up with the money, even with a devalued dollar, are the most likely cases for hyper-inflation.

Also, if the financial system cannot fund oil purchases then the only answer is the Treasury Market. For this reason there is a kind of trailing corrective that follows this whole mess in the form of high demand for US Treasuries, a demand subject to meltdown when the US consumer fails once again to sustain the oil price bubble.  Of course, at meltdown everybody rushes to the dollar because in those times they all want into the "safest thing possible". This kind of shaken baby style of self-correction is why I don't think that the US will see hyper-inflation. Many other countries will, but I believe that some kind of combination of contained scarcity driven inflation along with generally pervasive unemployment driven deflation is what is in store for the US.

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