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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.

Disclaimer

This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.


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