Oil Increases to Smash Equity Rally, Halt Consumer Spending
by Hiland Doolittle
The price of oil topped $82 per barrel on Wednesday. After a slight fallback on Thursday, oil is ready to open at $81.63 on Friday morning. Meanwhile, US equities are riding an eight-day winning streak and have the 12,000 mark in sight as the S&P 500 reached its highest point since October 2008.
Yet, a feeling of doom still persists over equity markets and the dollar index. And, the price of oil is very much at the center of the concern. Rick Szpila of JPMorgan Futures discussed the tenuous relationship between oil and equities with CNBC on Thursday.
“If you take a look at the movement of crude oil and the S&P 500 Index through most of 2009 and 2010, it has moved pretty much in the same direction. As equity indexes have risen, the oil index has moved up. The price of oil has not been a hindrance to equity markets,” suggests Szpila.
Another analyst, J.J. Burns of J.J. Burns and Company was more cautious about the oil-equity relationship. Using the fact that every one-cent increase in the price of gas accounts for $1.3 billion in diminished funds available for consumer spending, Burns stressed that a major equity disaster was looming.
Citing the fact that consumer spending is the key to national and global economic recovery, the price of oil is very much an issue. Twelve months ago, the average price of one gallon of gas in the U.S. was $2.60. Today that price is closing in on $3.00. The $0.40 per gallon increase translates to $52 billion in diminished consumer spending.
American motorists are now paying more for gas than any any time since October 2008. Prices rose further on Thursday on expected Spring and Summer increased demand.
The Thursday per gallon price rose to $2.799, once cent above Wednesday’s close. Prices have increased 18.9 cents in the last 30 days and 87.9 cents in year-over-year comparisons. Americans are now spending approximately $300 million more per day to fuel their vehicles than they did one-year ago. The U.S. Energy Department projects $3.00 per gallon gas by mid-spring.
The Repercussions
Last year crude oil was valued at about half of today’s $80 per barrel rate. On October 23, 2008, one gallon of gas averaged $2.83. Round Earth Capital Chief Investment Officer, John Kilduff, told CNBC that this summer he expects gas to hit the $3.10 level.
Most analysts expect a severe downturn in consumer confidence at the $3.00 mark. Low-income earners are already feeling the pinch, and retailers who cater to these consumers are nervously tracking spending habits. Stores like Wal-Mart and K-Mart are beginning to pare inventories in anticipation of the oil increase. The Southeast and West Coast are expected to be hardest hit by the rate increases.
Areas that presently have high unemployment or that rely on the construction industry are likely to be especially hard hit. One analyst projected that if prices top the $3.00 mark, the average Mississippi driver will spend about 11% of their income on fuel. One positive fact is that U.S. consumers are using less driving fuel than in recent years.
Tags: Consumer Confidence, Crude Oil, Economy, Retail Sales, US Unemployment
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
