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
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