As the average price of gasoline in the US goes over $US 4 per gallon in today’s depreciated US dollars. The risks to the already not so great “real economy” become even larger.
Note the less than 2% growth rate (annualized) for 1Q11 US real GDP that was reported this week. Not that the stock market cares about the “real economy”. Yes, I called it on the real GDP growth, but I’ve beaten that one enough for now. Also, the impacts of the not so great ”real economy” are finally starting to show up in some consumer oriented and industrial corporations financial reports in 1Q11.
Ignore financial companies bottom line or profits in their reports, with the exception of the net revenue line for pure banks (especially consumer oriented banks that actually make their money from the deposit and loan business model, rather than trading. These are the type of banks that give a true picture of what’s going on). If you look at the net revenue (basically interest income on loans less the bank’s cost of funding) line for banks you see that net revenue is finally starting to decline, or at least the “growth rate” is slowing as their interest margins get squeezed because long-term interests rates are being manipulated by the various central banks and especially the US Federal reserve with their bond buying programs using printed money. Again, ignore financial companies “profits” right now as there’s just too much “manipulation” allowed under the changed accounting rules with regards to pricing of the financial companies assets and loss reserves, reversals of previous reserves, etc. A lot of the ”profit” for financial companies is made up right now.
Back to gas prices. This chart in “inflation adjusted” US dollars (past prices have been adjusted to their equivalent purchasing power in today’s US dollars) for a gallon of gasoline shows in relative terms just what the average US consumer is facing to drive around town. It’s a given a new all-time high in inflation adjusted gasoline will be hit probably within the next 12 months (money printing tends to raise the price of commodities and near term consumables. This should not be difficult for anyone to understand).
Gas prices are one of the main risk triggers that could set the ball rolling downhill again. We’ll see.
We’ve been down a similar, if not the same path before. The end destination is not pretty.
US Gasoline Price in Perspective (Inflation Adjusted)
Note: It’s obvious the inflation adjustment on the data used for this chart has used the “government” inflation view to adjust the prices. Which we all know the government view of the inflation level is intentionally kept low. The fact is gasoline prices probably have much further room to rise to reflect the true “much higher” rate of inflation out there. You would re-build the data and start with nominal prices back in 1980 and adjust the future prices for the real ”higher consumer inflation” rate. You’ll see that today’s “nominal” gas price still has more room to run up. Same with oil.
A chart of “oil” futures prices over the last 5 years along side the ”RBOB” gas price. RBOB gas is just the base refined blend of gasoline that is sold as a commodity on the markets, before it is refined further into various other blends for the local market. RBOB gas price is not impacted by local taxes.
Note that oil and RBOB gas prices the last 5 years, move almost in lock step with each other. Which one leads and which one follows, probably does not matter in the end. We’re getting to a critical level in todays US dollar terms for both, and when you adjust for the real rate of inflation you can see that prices in today’s dollars have more room to rise. Do you really think the US economy could handle $5 or $6 a gallon gasoline? Not to mention the oil price required for $5 or $6 gasoline will impact the “energy price component” of everything, especially food. Very doubtful given the economic structure and more importantly, the ”car culture” in the US.
On this chart, RBOB gas is the “candlestick” data series and the price scale is on the right side. Crude Oil price is the “simple” line data series and the price scale is on the left side.
Crude Oil vs Gas Prices (US dollars) – Graph
Until next time!
Valdao Reputo (VR)
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Valdao Reputo (VR)
Valdao Reputo (VR) is involved in the capital markets as an investor and a buy side analyst.
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