On February 21, 2012
| Categories: Global Markets
, Market Commentary
With the ever so slowly resolution for Greece becoming a reality, most markets are turning their anxiety to the rising price of crude. The international energy markets have been shaken by the realization that Iran and its 2.5% of the world’s oil production may soon cause another economic shock. Though this concerns Europe more than the other continents, it surely puts a strain on everybody needing oil to help sustain the positive growth in the global economy.
As such, we have seen a steady and sharp rise in gasoline prices.
Many may recall that we extrapolated on the spread of crude and gasoline at the end of Q3 2011 and discussed its potential “stimulus” type impact on disposable income. That since has been lost as crude has jumped 38% since October and gasoline has jumped 11.5% over the last two months. As we noted, the historic spread detailed in September had to see a merging of the spread difference. Crude has most definitely been impacted by the political environment as well as the realization that global growth was surpassing to the upside.
We hear now that $4 gasoline is coming and potentially a shock to $5 per gallon by some pundits. If that were to happen for any length of time, it surely would have a huge negative impact on global growth that is still vulnerable to external shocks, even in light of the accommodative policy from central banks around the world. However, one must also look at two dynamic shifts and a possible replacement of natural gas to offset the meteoric rise in oil.
First, domestically we are the largest consumers of oil in the world at 19.15 million barrels per day. The European Union is second at 13.7 million barrels and China is third at 9.00 million barrels (Source: CIA World Factbook)
. What one should note is that when faced with similar shocks in 2007 and 2008, U.S. consumers altered their driving habits for the first time.
One should note that the rising price of crude actually becomes a speed bump to growth before spiraling into meteoric prices. This creates a floating ceiling to oil prices even in light of higher volatility expected in the short run.
Secondly, this also falls into a political issue that surely will cloud the Presidential election in 2012. It will potentially push for delaying restrictions in drilling in the oil shale fields, which we discussed several weeks ago. Recall, the expectation is that the United States is estimating an increase of 500,000 barrels daily by 2020.
Lastly, with the over-abundance of natural gas and its corresponding to very low prices in comparison to oil, we could see an acceleration of an already vocal group calling for utilizing it as a replacement for crude. Though it would require larger infrastructure to be built, we could very well see some speculative short-term money and potentially long-term investors push into natural gas as an alternative.
The price of crude – just as we see with the high amounts of federal debt – eventually will move to levels that cannibalize the growth of the economy. However, in normal recoveries where growth might run in the 4.25 – 5.5% range, these factors could move it to 3 – 3.5% growth. That may not seem like much, but when you consider most pundits are calling for 1.25 -1.75% GDP growth, there is still potential to outperform these tepid expectations.
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