Has Oil Reached the Tipping Point?

One of my favorite pastimes is watching the analytical
process of economists and strategists adapt (or not) to each new dynamic.
Paradigms are discussed, data is crunched, Econometric-models get reworked (too
often for the worse).
Recognizing change is but the first step to preparing portfolios for any and
all eventual repercussions.

The most prominent version of this has been the general
reaction to the rising price of Oil. Our vantage point in observing this comes
from our Bullish stance on energy (December 2003).
We have watched the punditocracy go through 5 stages of Grief
as oil ticked ever higher.

Be it out of Anger or Depression,
one common lament is that high Oil prices are a tax; they are not. Despite the
cliché, they are actually worse than taxes: they send US dollars overseas,
worsen the Current Account Deficit, and put a drag on consumer spending, as
well as business hiring and CapEx. Taxes, however inefficient a mechanism they
may be, at least get spent domestically – and as any good Keynesian
(i.e., President Bush or Fed Chair Alan Greenspan) will tell you, the impact of
hiring teachers or police, rebuilding highways, etc. is to stimulate economic
activity. Not so with sending Petrodollars to the Middle-East.

As we noted last week,
the impact of this is at long last being felt. The evidence reveals consumer
energy expenses are dragging down spending. Energy costs are an insidious form
of economic friction. They exact a cumulative drag on pocketbooks and psyches
alike. Those Economists who have use the example of high oil prices as proof of
the economy’s strength may not have fully considered the ongoing fatigue high
fuel prices exert – eventually – on the consumer.

Nowhere is this phenomenon more evident than in Wal-Mart
sales data. As the nearby chart shows, Wal-Mart’s out-performance is highly
dependent upon falling fuel prices. When gasoline prices are not dropping,
their out-performance relative to other retailers disappears.

Here’s the paradox: Wal-Mart is the leading importer of
Chinese goods. Yet the blame for high Oil prices is due to in part to the
enormous activity in China, itself a response to the Feds massive stimulus.

Thus, conservation methods won’t have much of an immediate impact on Oil
prices. Consumers here can drive less and buy smaller cars, but the impact will
be de minimus, as the primary demand driver is China, responding to consumer
demand for their products in the U.S.

Incongruous though it may seem, so long
as Oil stays pricey, it will boomerang back to hurt WAL-Mart’s sales – who
started China on their present economic path.

Who ever said economics wasn’t ironic?

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Rangachari Anand commented on Aug 24

    This post on Ben Jones’ housing bubble blog sums it all in my opinion.

  2. Andy commented on Aug 24

    I think you’re missing the target here. The US consumes oil at a rate of about 3x what China consumes. You can’t blame the problem on China entirely. And dissing conservation when we’re the largest consumer of oil seems short-sighted.

    What I can’t figure out is this:

    We’re not in an oil shortage. There are no lines at the gas pumps. Industries are not slowing down in their manufacturing because they can’t get enough energy. And yet the price of oil has doubled. Could this just be a bubble caused by rampant speculation?

    I agree, though, that higher energy prices will drag down consumerism, but only on the low end. Folks with money will still spend at the same rate; it’s the people who can least afford it who are getting screwed once again.

  3. erikpupo commented on Aug 24

    As this article shows, many people can turn to credit cards to mitigate some of the general pain caused by increasing fuel prices. But it seems to be becoming clear that the increased fuel prices are seeping into the economy and affecting prices on all sorts of goods…


  4. alf commented on Aug 24

    Another way in which they are worse than a tax is that they pour money into the pockets of enemies and also increase the propensity of regimes like the Saudis to delay reforms and buy off the nuts.

  5. lord moranosa commented on Aug 24

    the current oil prices have been inflated by the neo-cons’ brilliant campaign to create fear and paranoia over the terrorists, the terrorists, the terrorists are going to come and take us all over, and force us to become non-pork eating allah worshipping heathens. therefore, we must attack those ‘evil doers’ who, by the way, have the oil fields and oil reserves, and by taking over their terrorities, we can control the flow of oil.

    with this said, a large amount of ecomonic theory becomes dumped per se. certain measures remains intact, to artificially control the rise and flow of economic activity within the nation but such attempts tends to be like the band-aid applied to the several bullet holes in the chest and stomach.

    since 9/11, reasonable means to control the economic situation in lieu of the resonating bubble bursts of the dot.com/telecom/technology sectors were forsaken for a useless war that needn’t to have occurred in the first place. massive waste remains akin to the massive waste that was performed during the vietnam war and an oil situation that led to lines at the pumps because of opec’s overpricing of crude oil. as andy has stated in his comments, there doesn’t exist any oil shortage. however, there does exist a scam being perpetuated that goes against economic theories by, ironically, using economic theories in a superimposed fashion as what went on during the reagan administration and his ‘voodoo economics’.

    that by giving tax breaks to the highly wealthy, their monies will trickle down to the middle class and the lower classes. but the highly wealthy did what the highly wealthy chooses to do: parlaying their finances into larger amounts of wealth. with all of his tax cuts and tax programs to let the middle class breath and move, george bush jr. has only create a brief calm to an ongoing storm because while the oil industry are poised for still record quarterly profits, the drag that barry has indicated continues to ripple and consume throughout the nation.

    meanwhile, and this has been brewing for the last ten years now, the attempt to blame china for global evils and as the ‘new evil empire’ just continues to mask the problem that no truly effective economic measures has been created by the last several administrations to use the dot.com/telecom/technology bubble burst as a means to create a strong foundation towards creating a strong and enduring economic system.

    while many point to the large surplus that was accumulated after clinton’s last term in office, there wasn’t any strong economic programs put into place by clinton other than the ghost of george bush senior’s infamous dictum of ‘..read my lips…no new taxes…’ if we are talking economic theory here, doesn’t taxes create revenues that can be used to enhance a nation’s vital infrastructures, such as roads, bridges, public education, hospitals and research, policemen and fire fighters, construction that fortifies the basic infrastructures of a given city and town, or did i miss something in class..?

    since the reagan era, it appears that the theories of economics have been buried underneath a non-stop stream of talking heads talking about creating a bullish market that would run and run and run and run and run and run without having to cease and desist to create a powerful agenda of truly sustainable economic policies that could meet the moment, instead of living for the moment.

    when gas prices hit 3$ a gallon at the pump, i wonder if the situation will finally penetrate the minds of the talking heads, or will there still be a desire and an intent to remain in denialist’s mode until the sky does fall, and the situation can no longer remain avoidable let alone tolerable?

  6. dude commented on Aug 24

    I agree with the first comment: The problem is not China’s rising demand for oil. Americans are eager to look anyplce but the mirror for an explanation for high oil prices. In 1970, light trucks (SUV’s fit in this category) accounted for 5% of the nation’s vehicles. Today, they account for 56%. Over the last few years, the United States is the only developed country whose average fuel efficiency has DECREASED. We are the only developed country in the world that has dramatically increased our demand for gasoline. The average fuel economy in this country has been declining since its peak in 1986. Incidentally, I had a 1986 Honda CRX EF, which got 55mpg!! Today, a few hybrids do not even do that well.

    The new fuel efficiency standards that were released yesterday tell the story: They broke down the “light truck” category into smaller groupings then revised the fuel economy standards. The largest increase in fuel economy standards was a mere 1.3 mpg by 2011. What a joke!! If that wasn’t bad enough, they actually DECREASED fuel efficiency standards for one group!! The bill was nothing but another give-away to cronies of those in power. A bill that actually helps Americans would be nice. I know for a fact that millions of Americans would by a more fuel efficient car when given the choice, but the problem is that we don’t even have the choice!

  7. Fred commented on Aug 24

    China’s rising demand for oil is going to kill them. They are far less energy efficient than the U.S. or Japan. The Japanese are the world efficiency champs getting seven times the GDP per unit oil use than China. So, look for a resurgence of Japan and riots in China.

    Yeah, the CRV EF got 55 MPG but, you needed two of them; one for each foot.

Posted Under