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Oil: The US' Achilles' Heel
August 12, 2005

Higher oil prices mean higher gasoline prices and I don’t think there is a country in the world with more cars than the United States.

The US consumes about 9 million barrels of motor vehicle gasoline per day. That equates to roughly 140 billion gallons a year. Gasoline prices have increased from $1.50 per gallon to over $2.30 per gallon in less than two years, and prices are still rising. That eighty cent increase in gasoline prices means that the US will spend over $100 billion more on gasoline this year than two years ago, and that works out to an average of about $1,000 per household. Some households can afford to spend an extra $1,000 a year on gasoline, but some cannot.

The bottom line is that rising gasoline prices will ultimately reduce consumer spending and the US economy is so dependent on consumer spending that the rising oil price might just turn out to be its Achilles’ Heel. 70% of US economic activity is personal consumption expenditures.

The dollar fell this week and the gold price (not surprisingly) increased. Part of the reason for the fall in the dollar was better-than-expected economic numbers from Europe and an increase in capital flows to Japan. But part of the reason was weak US retail sales figures for last month. Excluding the auto industry that, as I described two weeks ago, is practically giving cars away, US retail sales were very soft indeed. Excluding autos, all other retail sales rose on average a mere 0.3% last month and that included a 2.4% increase in gasoline sales due to higher gasoline prices. Could the increase in gasoline prices already be taking its toll? Sales at furniture stores fell 1.3% and sales at building material retailers fell 0.4% despite the fact that we are still in the midst of a roaring real estate bubble.

Here are some interesting statistics I got from the US Census Bureau (latest figures are for 2003).

US energy production (in BTUs) did not changed from 1990 to 2003 but energy consumption increased by 16%. As a result, US energy imports increased by 65%.

Crude oil production fell 22% from 1990 to 2003 and crude oil imports rose by 64%.

Our dependence on foreign oil is (rightfully) a huge concern.

I am busy reading an interesting book that you might want to take a look at if you are interested in oil and energy markets, or even just the future of the US economy. It is called Twilight in the Desert by Matthew R. Simmons. Take another look at the above statistics and keep them in mind when you read this book. Matthew Simmons makes a case that Saudi oil production has already peaked and that the country has limited spare capacity. It is a sobering thought in a world that is evermore reliant on oil and energy every year.

Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com) or contact his publisher at (800) 528-0559 or (602) 252-4477.

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