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Economic Risk: The Gasoline Wild Card

  • Written by Syndicated Publisher 287 Comments287 Comments Comments
    February 24, 2012

    Of the many risks facing the US economy, the one I find most immediately concerning is the rapidly increasing rise in gas prices. My latest weekly gasoline update showed a 36-cent rise in gas prices, regular and premium, over the past nine weeks. In fact, it was about nine weeks ago that I filled the tank on our Prius at $2.98 a gallon just south of Myrtle Beach. Today the best price I can find in this area is $3.42.

    Will prices continue to rise? Most assuredly they will. The news today was filled with items on the rapid rise in the price of oil. West Texas Intermediate Crude (WTIC) hit an intraday high of 108.05. Priced in euros, Brent futures hit an all-time high, beating the previous record set on July 3, 2008. WTIC also hit its all-time high that day, and gasoline prices also peaked the same week.

    Unlike the situation in July 2008, which was in the midst of an ongoing recession with miles-drivenplummeting and was shortly before the market crash that accelerated the consumer flight to frugality, February 2012 has an air of optimism. The S&P 500 is 0.01% away from setting a new interim high, currently dating from April 29, 2011, and reports are circulating that retail investors are returning to the market.

    Perhaps gasoline at $4 plus in 2008 has conditioned consumers to be prepared for yet higher prices. Or perhaps the unusually warm winter and plunging price of the other gas (natural) has left sufficient room in the household energy allowance to absorb the rising gasoline costs without crimping the overall budget.

    As for the stock market, here is a snapshot of CME gasoline spot prices against the S&P 500 since January of 2006. How much further can the two rise in tandem?



    Earlier today wizard market technician Chris Kimble sent me a chart of gasoline futures and the SPY ETF:



    Shortly after I received Chris’s email, I saw this CNBC commentary: Get Ready for Gas Prices to Hit $5 by Summer.

    Can the US economy, about 70% of which is driven by consumer spending, continue to expand with five-dollar gasoline? There’s a good chance we’ll have an opportunity to find out.

    Images: Flickr (licence attribution) 


    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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