WSJ Sounds The Alarm: "There's No Getting Over" Gas At $4 A Gallon

Consumers, who are already being squeezed by rising interest rates (even as the return on their cash deposits remains anchored near zero), are facing another potential constraint on their already limited purchasing power. And that constraint is  rising gasoline prices, which, as we pointed out last month, could erode the stimulative impact of President Trump's tax plan as they sop up what little money the middle class has been saving.

As prices rise and banks scramble to update their forecasts, the Wall Street Journal has become the latest publication to sound the alarm over what is, in our view, one of the biggest threats facing the US economy in the ninth year of its post-crisis expansion. 

In its story warning about $3 a gallon oil (of course, we're already seeing $4 a gallon in parts of California and other high-tax states), WSJ cited Morgan Stanley's latest projection that rising gas prices could wipe out about a third of the annual take-home pay generated by the tax cuts.

Rising fuel costs can also feed inflation and pressure interest rates. Even though the Federal Reserve typically looks past volatile energy prices in the short term, higher energy costs help shape consumer confidence. And with the central bank poised to be more active this year, rising energy costs pose an additional risk to the economy.

Morgan Stanley estimates that if gas averages $2.96 this year, it would take an annualized $38 billion from spending elsewhere, an upward revision from the bank’s $20 billion estimate in January. That would wipe out about a third of the additional take-home pay coming from tax cuts this year, the analysts said.

...

Patrick DeHaan, petroleum analyst at GasBuddy"Three dollars is like a small fence. You can get through it, you can get over it," said Patrick DeHaan, petroleum analyst at GasBuddy, a fuel-tracking app. "But $4 is like the electric fence in Jurassic Park. There’s no getting over that."

Of course, MS's take appears downright pollyannaish when compared with a Brookings Center report that we highlighted last month.

The left-of-center think tank, which of course has every reason to hope that the next recession will materialize on President Trump's watch, projected that consumers would soon spend about half of the money saved from tax cuts on fuel costs.

And in a report published in April, Deutsche Bank illustrated how rising fuel costs will disproportionately squeeze the most vulnerable among us - a cohort of consumers who already shoulder an outsize share of the country's household debt.

DB

The FT put it another way...

FT

As the chart above shows, middle-income families - aka the engine of consumption - will be the hardest hit by rising gas prices.

Indeed, small business owners in California, where gas prices are the fifth highest in the nation thanks to taxes and stringent emissions standards, say they've seen their energy bills shoot higher in the past few months. Car salesmen say consumers are asking more questions about mileage, according to WSJ.

Robert Lozano, a car salesman in Los Angeles where some gas prices are already above $4, said the dealership’s gas bill has climbed from about $9,000 to about $12,000 a month recently.

Customers are inquiring more about electric vehicles, he said.

"It’s more in the consumer’s mind as to what the most efficient vehicle is."

With oil already at $70 a barrel, early indicators imply that the summer driving season could see an unusually large spike in demand for gas...

Vacations

...As the number of Americans intending to take vacations in the next six months climbs to its highest level in decades.

Heightened vacation intentions suggest the number of vehicle miles driven will also climb (because people tend to travel greater distances when they go on vacation). As the chart below shows, fluctuations in miles driven - a close proxy for gas demand - are quickly reflected in prices at the pump.

Gas

While the US's increasing prominence in the oil-export market could soften some of the economic blow as the energy business booms, other large business from airlines to shipping companies would feel the pinch at a time when costs are already rising.

But some economists say the growing importance of energy to the U.S. economy could blunt some of the impact from rising oil prices.

The country has become a more prominent supplier of crude oil and fuel. Domestic production has reached record weekly levels of 10.7 million barrels per day and a lot of it is being exported.

[...]

"People don’t understand how we could double crude oil production" and see higher gas prices, said Tom Kloza, global head of energy analysis at the Oil Price Information Service. "The answer lies in the balance of payment. We are an exporting power right now."

[...]

Airlines and shipping companies will also be paying more for jet fuel and diesel - costs that may be passed along to consumers. Even companies such as Whirlpool Corp. have noted that higher oil prices have boosted the cost of materials.

Refiner Valero Energy Corp. said it wouldn’t expect consumer demand to drop off until oil prices are at $80 to $100.

But demand is only one factor driving up oil prices. Supply issues have also weighed on oil traders' minds. Traders pushed oil prices higher as the US pulled out of the Iran deal as some worried that it could impact global supplies (though, as we've pointed out, there are plenty of other buyers waiting to step in and buy Iranian crude). Even if the Iranian crude trade isn't impacted by sanctions, plummeting production capacity in Venezuela could ultimately have a bigger impact on global supply.

Conflicts in other oil producing regions could also impact supplies, pushing prices higher.

Last week, Bank of America became the first Wall Street bank to call $100/bbl for Brent crude (at the time, it was trading around $77/bbl) in 2019. That could send prices to highs not seen since 2008. Other banks have been scrambling to raise their forecasts as well. 

With the Fed changing its language in its latest policy statement to reflect rising inflation expectations, rising oil prices could also inspire the Fed to hike interest rates more quickly for fear that the economy might overheat. That could result in four - or perhaps five - rate hikes this year. Unexpectedly weak consumption - which is responsible for two-thirds of US economic growth - helped constrain GDP growth during Q1.

The resulting effect would be like economic kudzu strangling the buying power of consumers and possibly forcing a long-overdue debt reckoning as millennials, who are already drowning in debt, are forced to put off home ownership and family formation until they're in their late 30s or even their 40s.

 

 

 

Comments

booboo Peterman333 Tue, 05/15/2018 - 11:18 Permalink

"The left-of-center think tank, which of course has every reason to hope that the next recession will materialize on President Trump's watch, projected that consumers would soon spend about half of the money saved from tax cuts on fuel costs."

I love the way these people think (actually I don't) so in other words

1. the tax cut is worthless since it will be going to fuel

and

2. the tax cuts should never have been passed.

setting aside the fact that we all know it blows out the deficit I really don't give a fuck, it's my money, I want it ALL back. Besides the other half will be used to buy gold or anything tangible. Fuck You

In reply to by Peterman333

directaction GunnerySgtHartman Tue, 05/15/2018 - 10:51 Permalink

The USA will move past $4/g gas and straight into an economy crushing upward price spiral. The simple reason for this is that USA consumes 20 million barrels of oil each day yet produces far less. Plus, imports remain high, yet the amount of oil exported worldwide decreases each year as historic oil exporters increase their oil consumption and deplete their reserves. As demand for fuel rises and the amount available for export declines either prices must rise or economies must falter.

The USA is a net importer of oil and petroleum products. This information has been widely reported and is available to anyone online through EIA data on their website. 

As I've been saying here for years from my ivory tower, oil depletion will utterly destroy human civilization. The only mystery is when, but it'll be very soon, probably during the middle of the next decade. 

 

In reply to by GunnerySgtHartman

MrNoItAll directaction Tue, 05/15/2018 - 11:19 Permalink

The oil industry operates on "economy of scale". To make all their production efforts worthwhile, they need hundreds of millions of oil-product purchasing customers. Price of oil gets too high -- customers stop or reduce buying, and the economy of scale breaks down leading to gluts of unsold oil, increasing storage costs and leading to other issues. They can ramp the price of oil for short bursts but not for sustained periods of time. The oil industry is truly fucked, and by extension so is modern industrialized high-tech civilization. Oil shortages are already here, just hidden by massive debt which pulls future consumption into the present. As the oil shortages grow more intense probably beginning around 2020, the ability of the global elites to hide the shortages under mountains of debt will erode to the point where the global economy begins rapid and chaotic breakdown TEOTWAWKI.

In reply to by directaction

iLLivaniLLi19 MrNoItAll Tue, 05/15/2018 - 12:43 Permalink

"When it becomes serious, you have to lie"

- Jean-Claude Juncker

The economic equivalent of the above quote is:

"When it's an important resource, we can't afford to subsidize it"

Now you know why oil and metals are not subsidized, but resources like Carbon, Corn, Sugar, and Water are subsidized.

 

Subsidies are for play markets, free markets are for serious resources.

 

In reply to by MrNoItAll

Automatic Choke directaction Tue, 05/15/2018 - 11:33 Permalink

yes! good! i agree with everything you say except the timeline you suggest....it will be a much longer and drawn out collapse. the reason is that oil underground is not in a "tank" that can be pumped out anytime....it is diffused through the rocks. as the reserves deplete, they become flow rate limited, not quantity limited. flow rates will drop, but only slowly and for a long time.

In reply to by directaction

directaction Automatic Choke Tue, 05/15/2018 - 12:02 Permalink

Yes, but as the flow rate declines, supply will drop (of course), and either shove prices up or crush the economy down. This will occur fast and soon. 

Either way the outcome will be the same: the end of industrialized society through wars, crushing poverty, disease, widespread famine and billions dead.

There is no possible other timeline or outcome.   

In reply to by Automatic Choke

Automatic Choke directaction Tue, 05/15/2018 - 12:11 Permalink

good points, but not necessarily. if the decline is slow enough, society can accommodate (doesn't mean they will, but possible). on a 5-10 year scale, people will move closer to their work, ditch SUVs for small sedans. light rail systems can expand. fission can make a comeback, which would actually make electric vehicles make sense. just needs a slow enough ramp.

In reply to by directaction

vofreason directaction Tue, 05/15/2018 - 12:10 Permalink

Or we could seize the biggest opportunity anyone has ever had economically and fully embrace solar and clean energy ...... not to be tree hugging hippies (although I actually like clean air and water and never understand why the redneck hunters don't) ........

 

.....but to absolutely crush our enemies by bankrupting them as they all only make money from pumping oil.  We could end our enemies, the control of the oil and defense industry here and all the while be the leader in developing the biggest, most necessary, money making technology the whole world needs...

 

.... but nooooo.......the rednecks in charge and global warming deniers supporting the Koch brothers would rather hand the advantage right into China's lap and seal our demise as we spend billions on middle east wars.

In reply to by directaction

zimboe ElTerco Thu, 05/17/2018 - 00:38 Permalink

You fucking one-note trolls.

Trump does x: x = bad.

go live in Russia, commie sluts...Sick of hearing your treasonous blubbering and bawling.

Soon, real Americans will use you for what your best suited for.Compost for the cornfields, protein supplements in the hog feed.You are that useless. It's your fate, sez Darwin. We don't need you.

You are rabbits and rabbits are food animals.

Got it, you wuthless snowflaggot culls? You are too fricken stupid to live.

You'll probably pack some luggage and a toothbrush when you get the gummint letter for a free! all expenses paid vacation in the luxurious Valley of Steel Spa TM .

E:

Some people think I'm bitter.

.

In reply to by ElTerco

MrNoItAll tmosley Tue, 05/15/2018 - 10:36 Permalink

Do some fact-finding, tmosley. America is most definitely NOT a "net exporter of oil". Only 40% of daily US oil consumption is domestically produced, the rest is import. America exports a relatively small and insignificant amount of "oil", most of that is "tight" (light) oil not suitable to producing diesel, mostly used to mix with other oil to produce desired blends. America a "net exporter of oil" -- dude, get your facts straight.

In reply to by tmosley

BangDingOw MrNoItAll Tue, 05/15/2018 - 11:58 Permalink

Mosley never gets anything right. US product demand right now is about 20.5mmbpd. Crude production is about 10. There are a lot of inputs to refining, eg ethanol is one of them, but suffice to say that this year we are net importing 5.0mmbpd crude+products vs. last year 5.5. We will never net export, although in north America we are almost beak even because Canadian oil sands has been steadily increasing. Conventional oil is now past peak.

In reply to by MrNoItAll

BigJim tmosley Tue, 05/15/2018 - 11:19 Permalink

Being a nett exporter of oil has certainly helped Nigeria!

As it happens, USD spent by consumers (in the US and elsewhere) on oil will mostly be recycled back into US Treasuries and US-manufactured weapons, so the US consumer does (indirectly) benefit, in that his neighbour who works for Raytheon will be able to buy a bigger McMansion and spend more in the local Starbucks, and his government will tax him less to spend the same or more.

Of course, you can debate whether the extra money in Uncle Sam's pockets benefits or harms the average American - more military-grade weapons for local police forces, anyone? - but that's a different argument.

In reply to by tmosley

Giant Meteor tmosley Tue, 05/15/2018 - 11:36 Permalink

No one ever said that repatriated cash doesn't do a lot of good .. should hold Mr.Market together a little while longer !

"Alas, the tax regime was changed under the pretext of encouraging US companies to invest this money in their operations in the US to grow in the US, hire people in the US, and crank up the US economy. Everyone knew this was a pretext for a corporate tax cut that would free companies to do what they’d done during the last “repatriation holiday” in 2004: Buy back their own shares, increase dividends, and jack up executive compensation packages. Ironically, companies that had “brought back” the most cash, ended up laying off the most employees."

https://wolfstreet.com/2018/05/13/why-i-think-the-stock-market-cannot-c…

In reply to by tmosley