With oil prices continuing to skyrocket, as we move ever closer to the summer driving season, consumers should expect to see gas prices at the pump exceed $5 per gallon very shortly. I filled-up last Sunday for $4.12 per gallon, so we are well on our way to that $5 per gallon handle already. At this point, even if oil prices were to pull back significantly, say if, for example, Gaddafi were to leave Libya, it is too late. Refineries have already committed to pricing for their supplies and whatever they have been able to do with regard to hedging has already been done. Oil prices, in fact, has been elevated for such as extended time-period that, at this point, any possible benefit from hedging that the refiners could have gained will have long ago evaporated with the expiration of future contracts.
Even if refiners were able to successfully hedge away the dramatic price increases we have seen up to this point, they would still raise prices because they have no guarantee that they can continue to hedge away their increasing costs for crude. Add it all up and you have the makings of a very expensive summer driving season. So what does this mean for consumers and for the economy?
For drivers, we already know what the impact will be because we saw it in mid-2008 when oil prices spiked to almost $150 per barrel - cars were abandoned in large numbers across the country and especially in places like LA, when gas prices surpassed $5 per gallon, as commuters were unable to afford to purchase enough gasoline to get to work from paycheck to paycheck. We will see this same impact unfold as gas prices once again soar.
For local economies that depend on tourism, for places like Las Vegas and to a larger extent smaller communities like Santa Barbara that depend more heavily on vehicular traffic rather than air travel, higher gasoline prices will have a significant, negative impact on economic activity. We will not see as much travel this summer, as families find alternative ways to recreate that do not involve burning fuel.
Watch for fuel surcharges on deliveries, air travel, and even traffic tickets issued by police agencies, as fuel prices rise once again above $5. Fuel costs permeate our economy, which was built on the interstate highway system, which accelerated our expansion west. The U.S. is a very large country geographically speaking, and commerce depends on moving goods across large distances. As fuel prices rise, economic activity in general will be constricted.
Unlike the 2008 oil spike, we have had sustained, high oil prices and I believe they will stay elevated for quite some time to come. This will very likely mean that, unlike the mid-2008 spike in gas prices, the current pricing structure for fuel will remain in place at extremely high levels for much, much longer than in 2008. The implications of this are significant, for consumers and the economy.
Interest rates will likely have to push higher in the near-term, which will have a somewhat positive impact on commodity prices, pushing them down. However, higher rates will also negatively impact stocks and the economy, making it more expensive for companies and consumers to borrow money.
I remain cautious on the financial markets as a result, and have doubts as to the U.S. economic growth forecasts currently showing 3%+ projections for 2011.