March 27, 2022
Weekly Market Outlook
By Keith Schneider and Donn Goodman
Oil. Commonly referred to as Black Gold. In one way or another, everyone on the planet uses it. Recently, every newspaper, financial magazine, National TV news, Congressional press conference and geopolitical commentary mentions oil and its rapidly rising price.
During the pandemic when the world was “locked down” oil use was low and at one point in 2020, the price of Oil went negative. That means the oil storage units in the US were full and could not take on additional supply. Therefore, the price plummeted, and we saw gasoline at the pump as low as $2.0 a gallon. Quite a different story today. (See chart below)
Then the economy opened back up and Oil prices quickly rebounded. However, there are several other reasons that Oil prices have continued to go up. During 2021 the price of oil went up by 60% and hovered around $80-85 a barrel.
Then Putin’s Ukraine incursion began in late February 2022 and Russia (the 3rd largest oil producer in the world only to Saudi Arabia and the US) was sanctioned and countries normally relying on Russia’s oil wanted to stop taking it. Russia exports over 5,000 barrels a day out of its country. (See chart below). This has only exacerbated the existing tight supply and higher prices for Oil around the globe.
Most Americans feel the direct pain in rising oil prices at the gas pump. Gasoline prices are up over 50% from early 2021. However, we still have among the lowest priced gasoline in the world. See chart below:
Most of the gasoline in Europe (bought in liters) is much above the price of our gasoline topping out at the gallon equivalency of $8-$10. In Russia, gasoline is approximately 50 cents a litre making a gallon approximately $1.75. In Italy gasoline is $2.50 a litre making it approximately $9 a gallon of gasoline. Remember that the next time you are at the pump complaining about the high prices of gasoline.
The US is self-sufficient for most of the oil we use with a daily deficit of a few million barrels a day which we import from places like Russia and Saudi Arabia. We had been more self-sufficient, but this administration has made it more difficult to produce oil (curtailing federal drilling leases) and we are finding it ever more necessary to bring it in from other countries.
Oil’s Impact on Inflation
In early March, the release of the monthly CPI (Consumer Price Index) indicted that inflation went up at a yearly rate of 7.9%. We have been writing about this in our last few week Market Outlooks. This was the highest rate in 40 years. Like many economists, we think it is up much more than that. Yet, energy is only a 7% factor in the price of the CPI with 4% for fuel and 3% for home energy prices.
The CPI was already close to double digits during the latter months of 2021. The Government continues to blame higher energy and food costs on the Russia invasion of Ukraine. However, prices for just about everything were increasing at an accelerated pace long before Russia stepped into Ukraine.
Here are a few more reasons for the rise in oil these past 18 months:
You may be surprised to know some of the main uses of oil other than for gasoline for your car. There are over 6,000 products that are made from Oil. Many more than you might expect. Let’s review the top 8:
Oil is a miracle product used in about everything in society, whether it is for driving, manufacturing, an integral part of our power supply or all the numerous by-products.
With the retail price of gasoline, the average middle-class consumer is being punished. Every day I read where people are now feeling the pain of much higher gasoline costs, especially those that have long commutes to work as well as the trucking community.
However, it is not just the average US citizen feeling this. I have some well to do friends who enjoy the use of power boats and their own airplanes. Both have told me that they, and their friends, are cutting back in a big way. Let me give you an example:
One friend with a 40-foot power boat consumes 50 gallons of gasoline an hour. If he goes boating, he will frequently be on his boat for an average of 2.5 hours. That amounts to about 125 gallons. In 2020 this cost him approximately $410+ to be out on the water. Today, it will cost him no less than $750 for the same 2.5 hours. That is an 80% or more increase in fuel charges. He is taking less day trips on his boat.
Another friend has enjoyed using his private jet which he personally owns. Many people use fractional jet service. Either way the hourly rate for these fancy toys have gone up dramatically. My friend was flying his jet for about $2,100 an hour in early 2021. Today it is close to $5,000 an hour and climbing (that also includes higher pilot fees, but fuel charges make up a considerable part of the hourly equation). He is now flying commercial and not using his own airplane much.
The price of oil is affecting us all in many different ways. As it climbs, Oil has a detrimental effect on the stock market. Higher costs are getting factored into everything including, but not limited to, the cost of transporting goods, higher production costs in manufacturing, higher power costs for shops, restaurants, movie theatres, entertainment venues and certainly office buildings. Higher costs for airplanes, cruise lines, hotels, and vacation homes. I could go on and on.
Furthermore, the impact of higher energy prices on agricultural products is profound as fertilizer uses energy intensive products and farmers need fossil fuels to propel their vehicles to actually farm. Increased crop costs also impact livestock production as well.
Learning from history, In the 1973, OPEC embargoed oil and the price went from $3 a barrel to almost 12 and that had a major impact on the price of soft commodities. In fact, much of the impact did not hit the soft commodities markets until a year or more after the initial embargo. It caused massive inflation and stagnation in the global economy for almost 7 years. Hence, it is hard to see how this inflationary surge remains transitory as the initial surge in Oil costs takes time to trickle thru to the general economy.
Higher oil prices will begin to affect the growth rate for US Corporations and will inevitably slow down the economy. This, coupled with the Federal Reserve’s plan to rein in inflation by raising interest rates, will surely cause an economic slowdown. Most economists estimate the growth rate for 2021 at no more than 1-1.5%.
Here are a few of the things that you can do to better protect your portfolio from the rising costs of fuel as well as other goods and services in the US:
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