Oil Rally Continues Despite Poor Fundamentals
Despite some contradictory signs, oil prices have been gaining steadily based on reports that U.S. oil inventories have dropped and concerns about production disruptions in both China and Nigeria. A report from cnbc.com speculates that economic weaknesses and contradictory signals about the dollar’s strength won’t significantly impact the trend of rising oil prices.
Often linked to inflation and higher interest rates, oil prices have narrow windows for growth where they can exert positive influences on economic conditions but a wider range where economic instabilities occur. This is especially true in the current market where long-term prospects favor substantial increases in stagnant oil prices and record-low interest rates.
Most analysts predict rising interest rates “given (the) deep market skepticism in the Federal Reserve (that) firing an interest rate hike in the near future (is likely),” according to Western Union Business Solutions senior analyst Joe Manimbo. Oil prices dropped to a 12-year low early in 2016 but many have recovered substantially, and economic forecasters generally agree that the outlook for oil prices favors significant increases.
Despite Global and U.S. Economic Weaknesses, Oil Prices Continue to Advance
Oil price gains can certainly spur economic growth, but hikes in crude oil prices almost always generate inflationary pressures according to an article posted on www.investopedia.com. The report suggest that there a direct correlation between oil prices and the inflation rate that became extraordinarily clear after the 1973 OPEC oil embargo “when the cost of oil rose from a nominal price of $3 before the 1973 oil crisis to around $40 during the 1979 oil crisis.”
This extraordinary change caused long lines at gas pumps, gas rationing, massive inflation rates and changes in oil policies and auto manufacturing to favor production of smaller cars. The Consumer Price Index is the key yardstick that measures inflation, and it more than doubled in eight years from 41.20 to 86.30 during the time that oil prices were skyrocketing in the 1970s. It had previously taken 24 years for CPI prices to double. Other key economic benchmarks that rising oil prices affect include:
- Diverting investment resources away from replacing infrastructure and increasing the costs of oil-based materials like asphalt
- Generating more expenses for all government agencies and jurisdictions, which include paying unemployment benefits and higher utility costs for heating buildings and steeper prices for gas to operate auto and truck fleets
- Reducing discretionary spending on travel, luxury goods, automobiles and heating and cooling systems
- Cutting profits for most businesses that use oil-based products
- Increasing the costs of plastics that are manufactured using oil resins
- Creating the conditions for a recession or economic depression
- Causing wage and salary freezes throughout the corporate world to make up for paying higher prices for oil and products whose prices are impacted by the cost of oil
- Increasing the price of natural gas despite an abundant supply because drilling for gas uses oil, asphalt and chemicals made from oil
- Raising the prices of food due to increased transportation costs and more expensive farming, harvesting and preparation processes
Oil prices can only increase despite conservation efforts, energy-efficient technologies and alternate sources of power. According to ourfiniteworld.com, oil prices must inevitably rise because world supplies are limited, and the industry has already extracted the easiest oil. Remaining reserves are under the sea or near the North Pole or require fracking processes, all of which make extraction more expensive, dangerous, and environmentally risky. Oil prices must reflect the costs of extracting the petroleum and ever-increasing premiums on a finite commodity. Oil is the biggest source of energy, and its price affects the prices of other forms of energy.
Oil Prices Put Low-Income Families at Extreme Risk for Multiple Economic Threats
Rising oil prices — while potentially beneficial to some investors and government revenue streams — can prove life-threatening to families with low incomes or workers who have jobs that depend on relatively stable consumer prices. These people and families face multiple threats from rising oil prices that include:
- Risks of losing jobs
- Small business vulnerability
- Cuts in other spending to make up for essential transportation and heating costs
- Possible life-threatening situations due to being unable to afford enough oil to heat homes sufficiently
- Layoffs that become common during periods of higher inflation or recession
- Increased housing and rent costs fueled by high energy costs
- Higher utility bills even for services not directly based on oil prices
Increases in oil prices never go away unless there’s a severe recession, and recessions create their own hardships that are usually even more severe than those caused by higher oil costs and double-digit inflation rates. People with low or limited incomes, little or no savings and few outside resources can really become trapped in economic limbo while waiting for conditions to improve, government assistance, unemployment benefits and other economic aid.
It’s not just low-income families that face these problems when inflation gets out-of-hand or the economy sinks into recession. Rising oil prices can generate a domino effect that wipes out savings, eliminates jobs, reduces discretionary income and affects people from all socioeconomic levels.
Putting a Price Tag on Family Security
Consumer advocacy groups often fail to grasp these real-world problems of low-income families and middle-class families. Rising oil prices — while possibly useful for strengthening the dollar and the U.S. economy — could have devastating effects on many working-class families. If you’d like to learn more if oil prices continue to rise, contact us at http://personalmoneystore.com/ to stay informed about these and other critical financial issues.