Although U.S. demand for crude oil has fallen by 1.5 million barrels per day since 2007, anyone spending more than a few minutes on the road, watching TV, or surfing the internet will be more than unpleasantly aware of the rapid rise in gas prices recently. As we noted earlier, following January's record high average gas price, February just surpassed its own record and TrimTabs quantifies the impact of this implicit tax on consumption, noting three key factors that will remain supportive of high oil prices: Central Bank liquidity provision (ZIRP), political tensions, and implicit USD devaluation. Critically, around 70% of the benefits of the payroll tax extension has already been removed thanks to 60-80c rise in gas prices nationwide whose growth has far outstripped wage and salary growth in recent years. As Madeline Schnapp points out, while the latest round of oil speculation is likely to end with a pop, she doubts oil prices will drop much below $100/bbl as the erosion of purchasing power from high energy prices is here to stay.
TrimTabs Macro Spotlight: Surging Gas Prices Unintended Consequence of Zero Percent Interest Rates and Trillions of Dollars Pumped into Financial Sector.
Spike in Gas Prices Equivalent to $80 Billion Annualized Tax on Consumption. At Current Gas Prices, 70% of Benefit from Payroll Tax Cut Wiped Out.
We spent some time recently driving on Interstate 5, the main north/south highway in California. In little more than a month, the price of gas rose from $3.69 per gallon to $4.49 per gallon, an increase of 80 cents, or 22%. After filling our tank the last time, the change from a hundred dollar bill was just 69 cents. Ouch!
Our experience prompted us to take a closer look at what is driving fuel prices higher. Although U.S. demand for crude oil has fallen by 1.5 million barrels per day since 2007, three factors are likely to remain supportive of oil prices:
- Dictated interest rates are at or near zero in much of the developed world, and central bankers have flooded the financial system with enormous amounts of freshly printed money. One of the logical places for this liquidity to flow are highly liquid, highly leveraged commodity futures contracts. The rising number of outstanding contracts helps push prices higher, which in turn draws more speculators into the market. This speculation was the primary driver of high oil and gas prices in the summer of 2008 and is likely contributing to high prices today.
- Political tensions are heating up between Iran and the West about Iran’s threat to block the Strait of Hormuz. The fear premium from this factor is probably $8 to $10 per barrel of oil.
- There is a strong negative correlation between oil and gas prices and the value of the U.S. dollar. The Fed’s money printing puts strong downward pressure on the value of the greenback. While a weaker dollar boosts U.S. exporters, it hurts consumers, who face higher prices for commodities that are produced overseas but are priced in dollars. While the value of the dollar (DXY=78.8 on February 23, 2012) is well above its trough in the past four years (DXY=71.7 on March 17, 2008), it is well below its peak (DXY=88.5 on March 9, 2009).
The 60-cent to 80-cent increase in gas prices nationwide over the past two months is equivalent to a $60 billion to $80 billion annualized tax on consumption. Since the payroll tax reduction is estimated to have put $114 billion back in consumers’ pockets, the recent run up in oil has negated about 70% of the benefit of this tax cut.
Looking at the increase from another point of view, we estimate the annual increase in wages and salaries over the past 12 months is only $185 billion. A $60 billion to $80 billion annualized increase in fuel prices effectively wipes out about 35% to 45% of the increase in wages and salaries.
Taking a longer view, gas price increases are far outstripping wage and salary growth. Since 2005, gas prices in the Los Angeles area have more than doubled, rising from an average of a little more than $2 per gallon to $4.35 per gallon in the past week. Meanwhile, wages and salaries rose only 15.4%.
While the latest round of oil speculation is likely to end with a pop, we doubt oil prices will drop much below $100 per barrel. The erosion of purchasing power from higher energy prices is here to stay.
Real-time income tax withholdings suggest real wage and salary growth was barely positive in January and February. If fuel prices hold steady or rise further, we expect real wage and salary growth to turn negative.
Bottom Line: Rapidly Rising Fuel Prices Put Sluggish Economic Growth at Risk.