Oil's Not Well on Wall Street

[Rob-TheStormChaser]

There won't be a spring break for this shock-sensitive stock market because the surge in gasoline prices could tip the fragile economy back into recession.

The whopping 33 percent jump in crude oil prices over the last three months to $37 a barrel, a 29-month high, as Washington gears up for war with oil-rich Iraq, is slamming woozy American consumers who sense they're looking down the barrel of record gasoline prices in the coming months.

Most worrying to economists is that painful spikes at the gas pump have been known to bring the economy to its knees.

High energy prices would further erode corporate earnings, which are practically dead in the water.

The inflationary implication of rising oil prices would also limit the ability of the Federal Reserve to come to the rescue of the economy by chopping interest rates, again. The master mechanics of the economy at the Fed have just about run out of wiggle room after cutting rates to the lowest levels in more than 40 years.

Surges in oil prices in this energy-dependent nation have historically been economy killers. It's a lose-lose situation for most economies, but more so for the United States because higher prices are a tax on consumers who generate two-thirds of economic growth.

Bear in mind: Prices may not fall significantly even if the United States launches another Gulf war. Few people envision a replay of the script of 1991 when oil shot up in the crawl to war and plummeted after the first shot was fired.

NO SUMMER OF LOVE

There are a lot of reasons to worry because the Department of Energy estimates U.S. oil supplies are at a 28-year low.

Although the streets of New York and the world's other major cities were thick last weekend with protesters against a U.S. war with Iraq, the stage is not being set for another "summer of love." No, my friends, instead of 1967, it's beginning to look a lot like 1973 again.

Government officials say that even if war is avoided, oil will probably stay above $30 a barrel this year. The sticker shock will hit motorists during the peak summer driving season. Predictions are that gasoline may hover at a record $2 a gallon or more in some parts of the country.

AAA, the motoring club, said this week the average unleaded gasoline price was $1.66 a gallon, just below the record $1.71 reached in May 2000.

The moonshot rise in prices presents a real threat to economic growth, Wachovia Securities says.

"The run-up in gasoline prices has caused us to scale back our forecast for second-quarter growth," says John Silvia, chief economist for Wachovia Securities. "Higher gasoline prices are clearly taking a toll on already jittery consumers."

Silvia slashed his economic growth target to 1.0 percent from 3.1 percent and remains cautious that any post-Iraqi bounce will be more modest than most people expect.

"We cut equipment spending, lowered inventory gain and increased our estimate of the nation's trade deficit," he says.

Silvia's original scenario had been based on the war being over by the first quarter. But continued opposition in the United Nations Security Council to the use of force against Iraq will add to the indecision and delay any expected economic recovery until after the second quarter.

Merrill Lynch also weighed in, saying it sees first-quarter growth at a flat 1.5 percent and cautioned that the Fed's growth target for the year of 3.50 percent to 3.75 percent as overly optimistic.

"It will probably take 4 percent annualized growth in the second half of the year to get the 'official' forecast of 3.50 to 3.75 percent on a Q4/Q4 basis," the brokerage house told clients this week.

History is full of examples that when Americans have to pony up a lot more money for gasoline, they've quickly cut back on spending and the economy has suffered.

The economy dipped into recession following the oil crisis caused by the Yom Kippur war in 1974. The same thing happened in 1979 after Iraq invaded Iran. Economic growth also slowed when Iraq invaded Kuwait in 1990 and it set the stage for the Gulf war.

NO DUCT-TAPE SOLUTION

Even if the OPEC oil cartel goes through with its pledge to pump more oil to dampen a war-related jump in prices, the world's tanker capacity has eroded to the point where there aren't enough ships that can transport the stuff to the United States fast enough to avoid a price surge.

For example, the Organization of Petroleum Exporting Countries and other producers increased oil production by 1.2 million barrels a day in January. But the oil has still not reached U.S. refineries.

Then there's the issue of hope over reality. The cartel would be hard pressed to raise capacity if Iraq stopped producing because Saudi Arabia and perhaps, the United Arab Emirates, are the only producers with extra output to make more oil available to the world market.

The nation's dependence on foreign oil is frightening. The United States imports more than 11 million barrels a day, or 55 percent of its total consumption.

In its latest weekly update, the U.S. Energy Information Administration, the statistical arm of the U.S. Department of Energy, says gasoline prices increased for the ninth consecutive week, and the hike of 8 cents a gallon matched the biggest rise since the EIA started tracking the data in 1990. Heating oil prices are at a three-year peak.

Energy prices are going through the roof at a time when consumers are tapped out.

Consumer confidence, as measured by the University of Michigan, fell in February to the lowest reading since September 1993.

The smart money says it's just a matter of time before the slump in consumer confidence translates into an equally deep drop in spending.

Worth keeping in mind is this: Consumers, who have single-handedly kept the economy from slipping back into a so-called double-dip recession for the last two years, are now exhausted. They're loaded up to their eyeballs in debt.

So an oil-price shock would give the battered U.S. economy -- and the drivers of those gas-guzzling SUVs and pickup trucks -- a very rough ride indeed.

For the week, the blue-chip Dow Jones industrial average gained 1.38 percent to finish at 8,018.11, based on the latest available figures. The tech-laden Nasdaq composite index jumped 2.96 percent, while the broad Standard & Poor's 500 index ended the week up 1.59 percent. Friday's close marked the stock market's second straight week of gains.

[cycloneye]

In simple words folks prepare for more increases in the price of gas in the comming weeks.

[Rob-TheStormChaser]

Yep...I dont think we'll see it level off like they implied a week ago. Seems like small rises will be noted in days and weeks to come. I hope they do something about this.

[Stephanie]

Good article Rob - thanks for sharing it!

This will also mean the national debt will skyrocket even more!

[coriolis]

Get rid of the evil SUV's, the devil's vehicle!
Raise the mandatory mileage for all vehicles.
Americans are so afraid of a little pain. I think we need some corrections to our collective attitude. We're fat, we're spoiled, we demand convenience and instant gratification.
Move close to work, ride the bus, ride a bike, walk!
There's so much we could do to conserve.
Maybe they could temporarily lower the taxes on gas.
With higher prices, domestic production should go up.
I really don't care that much about gas prices I have a 10 minute drive to work and I can ride the bus and my bike. Too far to walk though.
Our parents lived through a depression, we can survive a little ripple like this.
BTW, if the stockmarket takes a s***, so does my 401K. I'm going to keep on working until I'm 80 anyway.

[breeze]

Yep, me and the 'ole granny-mobile will have to keep going
the 50 mile round-trip drive to work, regardless of how high
the prices of gas go!

[Rob-TheStormChaser]

Thats true...even though the world isnt in a crunch so to speak, we still have to run out and pay higher prices for the things we need like gas, cigs, heating oil, duct tape...lol Things will fluctuate on the upper scale for awhile until things are dealt with overseas.

[coriolis]

I hope I didn't step on any toes with my rant above. Sometimes I get like that. Breeze, I know that the circumstances of life sometimes force situations that you would not prefer, like a 50 mile commute. So if I sounded insensitive, please forgive me.

Rob, duct tape is a necessity. My car's held together with it, but it still gets 35 mpg. My bike is worth more than my car.
Priorities, you know.

[Rob-TheStormChaser]

lol I know all about duct tape....they call it 100mph tape in the Army...we used it for everything under the sun!

[Stephanie]

My toes weren't steps on! Actually I got a chuckle out of your post Coriolis. I agree with everything you say!

[coriolis]

cool

[JQ Public]

Get rid of the evil SUV's, the devil's vehicle!
Raise the mandatory mileage for all vehicles.
Americans are so afraid of a little pain. I think we need some corrections to our collective attitude. We're fat, we're spoiled, we demand convenience and instant gratification.
Move close to work, ride the bus, ride a bike, walk!
There's so much we could do to conserve.
Maybe they could temporarily lower the taxes on gas.
With higher prices, domestic production should go up.
I really don't care that much about gas prices I have a 10 minute drive to work and I can ride the bus and my bike. Too far to walk though.
Our parents lived through a depression, we can survive a little ripple like this.
BTW, if the stockmarket takes a s***, so does my 401K. I'm going to keep on working until I'm 80 anyway.

Great post Coriolis. I must say i agree with you 100%. We really need to stop this spread of suburbia. The only reason public transit works in europe and nyc is b/c they are very compact and don't have places to spread. Until we condense our population centers...we will have trouble getting people to ride public transit.

[coriolis]

Thanks, JQ. And to think that I later issued a partial retraction. We make a lot of little decisions every day, that can add up to a lot of energy wasted. Americans (myself included) can be a bunch of crybabies at times when things get inconvenient, let alone difficult.

[Intimidator]

Most of this is just Hype. Scare tactics and the like IMHO