For the benefit of those of you who may indeed be reading this from under a rock, I will point out that the prices of both gasoline and oil are at highs, with more highs coming. I will not be shocked if Trilby Lundberg continues to announce record high gas prices at least once a month until Labor Day. On the West Coast and many other places, you can expect to pay at least $2 per gallon, even at Bad Neighborhood No Name Gas Co. Quickie Mart. Some analysts are predicting a full blown 70s style oil crisis. Any readers from elsewhere in the country who might be able to shed light on whether gas prices are really higher in Red States than Blue States, please feel free to comment.
Some of you are wondering when these kinds of things are going to have an impact on the economy at large. The answer is right about now. The world’s biggest retailer, WalMart, figures the current price of gas costs its customers an addditional $7 per week. This of course means about $45 less they can spend each month on other necessities, let alone desires. This is a big deal to the typical WalMart shopper. This is almost certain to effect all but the highest end retailers.
The fact that almost every product you can have in your home spent part of its supply chain in a truck means that rising gas prices very quickly translate into general inflation. It’s happening now. The Europeans are worried about us. Well, more precisely, they are worried that inflation will effect earnings, and they are worried about the standard prescription for inflation, interest rate hikes. Oh, make no mistake, they know it’s coming. They are concerned about the timing and dosage. After all, the Fed Funds rate has been sitting at 1% for a while. A modest sounding 25 basis point hike (0.25%) would be a rise of 25%! As if that isn’t enough, there is some evidence to suggest that spikes in oil prices come before recessions.
Want to know who else is worried about oil prices? The Airlines. All those planes use a lot of fuel. It should be no surprise that when you can’t control your costs, you can’t predict how much money you will have at the end of the quarter. Frankly, the airlines have enough to worry about. Consumers just don’t like what’s happened to traveling by air. Even the TSA realizes there is a problem.
Alas, it isn’t as simple as just pumping more oil. Here’s Paul Krugman’s take on the situation. In short, however much the Saudis would like to control crude oil prices, they can’t. The oil they are able to bring online in a timely fashion has too much sulphur in it. And OPEC is already pumping over its targets. Bringing new sources online is a long term answer to an emergency problem. In Alaska, they are not counting on these high prices lasting for long. Seriously, new sources of oil can take 5 to 10 years to yield marketable quantities. And that’s assuming there is oil to be found, that permits can be obtained, that the area is accessible, that the oil can be transported away….
Of course there are some winners in this oily mess. The Globe and Mail has a nice well thought out list, but really, the only one you need to know is this: Oil Companies.
Yeah, they are making millions on the additional $7 per week that WalMart estimates each customer is spending at the pump.