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buffalonate (48.32)

High Gas Prices Kill Growth, Everytime!



June 08, 2011 – Comments (8)

On April 28th I wrote a blog saying that the market was overvalued and that high gas prices would kill the economy.  I said that the market would have a big pullback in the next couple of months.  A lot of people said that you can't predict the market and it is too random.  I would argue that if gas prices skyrocket you can predict the market.  Since my prediction the Dow is down 6%.  Many economists believe that high gas prices caused the recession in the first place.  For proof look at the gas prices from July of 2007 at the height of the market.  In July of 2007 the stock market and gas prices both peaked and crashed after that.  If you look at the last couple of months gas prices skyrocketed and the market soon crashed.  If you look at the charts of the DJIA and gas prices they correspond very closely.;range=5y  I hope that the next time gas prices skyrocket again people will be smart enough to see the market crash coming and get out of the market. 

8 Comments – Post Your Own

#1) On June 08, 2011 at 7:19 PM, brickcityman (< 20) wrote:

So maybe QE3 should instead take the form of picking up a part of everyone's gas tab?  ...   Somehow I can see Uncle Ben cardboard cut-outs advertising "low low prices" next to pumps along every roadway.

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#2) On June 08, 2011 at 7:38 PM, buffalonate (48.32) wrote:

I would be in support of the govt running a refinery and flooding the market with gas every summer.  That would put an end to the market manipulation.  There is no oil shortage right now.  The only shortage is gasoline because big oil is only producing at 81% of capacity right now.  You could argue that they guessed wrong in their demand estimates but that would be nieve.  Their "guessing wrong" is highly profitable for them because it pushes gas prices sky high. 

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#3) On June 09, 2011 at 3:48 AM, awallejr (30.83) wrote:

Any economist who argued that the recession was caused by high oil prices back in 2008 completely missed the boat then.  While there was a strong spike, that was more coincidental than causative.  Oil had nothing to do with the housing bubble.

The correlation has more to do with seasonality coinciding with the "sell in May" thesis.  You will see oil in the 90s if not the 80s later this year, assuming no major supply disruption.  As for the market it reacts to GDP and corporate profits in the end.  If you see weak GDP growth, then the market will remain soft.  If you think GDP will pick up 2nd half, then the market will head over 13,000.  I am in the latter camp myself.  Corrections are always healthy in the end for bull markets.  And we are in a bull market.  So says my crystal ball anyway.

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#4) On June 09, 2011 at 8:57 AM, buffalonate (48.32) wrote:

High gas prices suck the life out of the economy.  High gas prices make people cut back on a lot of expenses.  They stop going to restaurants and buying things that aren't absolutely necessary.  The graphs I showed above present pretty good proof.  Gas prices regulate growth.  The better the economy gets the more the traders bid up oil prices.  Eventually the oil gets so high it kills the economy.  If gas prices were $2 a gallon we wouldn't be having a pullback right now.  I think you are right that the economy will rebound but only after gas prices crash.  High gas prices didn't cause the financial crisis but it sure didn't help.  High gas prices take a lot of money out of people's pockets making it much more difficult to pay your mortgage. 

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#5) On June 09, 2011 at 9:39 AM, buffalonate (48.32) wrote:

If you look at the work of Economist James Hamilton the effect of high gas prices on the economy is pretty clear.  He has shown the a 10 cent rise in gas prices causes a half point decrease in consumer sentiment.  He has also shown that in the last 8 oil spikes that a recession followed 8 months later. 

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#6) On June 09, 2011 at 2:15 PM, awallejr (30.83) wrote:

Oh don't misunderstand me.  I agree that increasing energy costs will have an economic impact.  As for positive or negative that could depend.  A person who is paying say $20 more at the pump per week, will have to take that from somewhere else in their budget.  So they may stop going to that night out where they would spend say $30 for a nice dinner (tip, tax and all), but bring home a pizza instead.  Restaurant lost, pizza parlor won.

My comment was disputing a causal relationship back in 2008 between oil prices and stock market crash.  It had nothing to do with C going from $55 to .97, or Bear and Lehman disappearing as companies, or basement bottom prices on pretty much any stock.  That was from the housing bubble. 

If gas was $2 a gallon you'd still have 9% unemployment, tho the working people might feel a little better, so the sentiment correlation Hamilton suggests could be a valid one.

But remember in 2009 it was in the $2s.  Look at your first chart and take it back 3 years.  You will see a bottom price end of 2008 and a steady increase of gasoline since, all along with a rising market as well.

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#7) On June 09, 2011 at 5:52 PM, buffalonate (48.32) wrote:

My argument would be that an economic downturn would have happened anyways regardless of the financial crisis.  High gas prices inevitably cause a recession or at least very slow growth.  The financial crisis was a ticking time bomb that would have happend eventually no matter what gas prices did.  I believe the high gas prices gave the housing market a nice push off the cliff.  

In 2009 the gas was $2 because everyone knew the economy was crashing.  There was no demand for oil.  The high oil prices of 2007 had already pushed the economy off the cliff.  Oil prices are a function of how healthy the economy is.  The better the economy does the higher gas prices will be because traders think oil demand will be high crimping supply.  Eventually the high oil prices will destroy growth.  

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#8) On June 09, 2011 at 8:15 PM, awallejr (30.83) wrote:

Well you could take your chart out to 6 years and you will see gas hit or flirted with $3 several times.  It then went nuts in spring of 2008 more over speculation and fears of peak oil, and China and how daily production was less than daily use, etc..

Bernanke raising interest rates to over 5% from 1% was the market bubble burster. 

Eventually high prices encourage alternatives and actually can create new technologies, jobs and growth too. The easy oil is gone.  No longer can you play Jed Clampett and after shooting for some food up from the ground comes a bubbling crude. You are now seeing at least some movement towards viable alternatives.

Everyone knew the economy was crashing in the Fall/Winter of 2008, where gasoline bottomed at 1.61, and steadily climbed since that bottom well before the market bottom in March of 2009.  I won't dispute that higher gasoline/oil prices can hurt a recovery.  But I disagree that that is the reason for recessions. It certainly wasn't true for the recession, and really wasn't true for the last one.

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