By Jeff Weniger, CFA, WisdomTree Investments
Special to the Financial Independence Hub
“Judging by the oil market in the pre-OPEC era, a ‘normal’ market price might now be in the $5-10 range … Last week Algeria’s energy minister declared, with only slight exaggeration, that prices might conceivably tumble ‘to $2 or $3 a barrel.’”
—The Economist, March 4, 1999
That quote feels like it was from a million years ago. A decade later, straight-faced economists would be talking about US$200 or US$300 per barrel. Times change.
With oil two years along in a bull rally that has witnessed its price triple from lows in the first quarter of 2016, it may be just a matter of time before the purported list of stock market obstacles starts to include retail gasoline pain. With West Texas Intermediate (WTI) crude oil changing hands at US$67.44 and Brent crude at US$73.26, it’s hard not to be scared off by our collective ups and downs at the gas station.1
After regular unleaded challenged US$4 a gallon — $3.695, to be precise2 — in the summer of 2014, many strategists began to fear the worst. Gasoline would once again deal the death blow to the American middle and lower classes, as it had a half-decade prior.
But 2014 marked the worst of it, at least for now. WTI crude oil collapsed from triple digits to less than $30 in early 2016. Retail gas followed along, to levels south of $1.80.
But it has quietly chipped back, closing the first quarter at $2.57, and $3 looms in the American psyche. Unlike in Canada, where expensive fossil fuel prices tend to benefit the federal budget, Alberta employment and so forth, Americans historically have had no similar solace outside of petroleum-rich Texas and Alaska, perhaps. It’s just a different economy. People remember the first time they saw a gas station post a price of $1, then $2, then $3. And at $4, that memory strikes the gut: the insolvency years.
Regular Canadians feel pain from expensive gasoline, for sure, but not quite like the pain that hits Americans.
Tie the threat of a national average of $3 per gallon south of the border, maybe during the Labor Day road trip, with the possibility that U.S. Fed Chairman Jay Powell may bring two or three more rate hikes of 25 basis points by this year’s close, and it is not much of a leap to be sympathetic to a thesis of a gasoline-induced blow to American consumer confidence. But be careful, because that thesis is flawed.
Whispers
The “whisper number” on Saudi aspirations for Brent crude is $80 to $100 per barrel. But Donald Trump was already tweeting angrily at $70 per barrel, so it is reasonable to assume that another $20 to $30 would unwind much progress on recently fruitful U.S.-Saudi relations. But suppose ROPEC — Russia plus OPEC — marks oil up to $100 anyway. Gasoline could be closer to $4 than $3 in that circumstance. Does that break the American consumer? A half-generation or a generation ago, yes — certainly. But psychological anchoring on round numbers like $100 or $3.00 deceives. Consider our analysis below.
Our 2018 Reality
Figure 1 places unleaded gasoline costs in context. The U.S. population of some 322 million people consists of 126 million households driving more than 3 trillion miles per year. But because millennials do not drive as much as their predecessors, the number of auto miles driven per household has fallen to less than 25,000 from a peak of 26,413 in 2004.
Additionally, today’s cars are essentially computers on wheels, and fuel efficiency is notably higher than it was in prior years.
Twenty years ago, the American new car fleet got 23.4 miles to the gallon.3 By 2008, it was virtually unchanged, at 24.3. But the U.S. got burned on triple-digit oil, making it somewhat politically palpable when the Obama administration pushed forward with mandated 54.5 mpg fuel economy targets for model year 2025. In pursuit of such efficiency, the new car fleet’s efficiency rose to 30.0 mpg for the 2017 crop. Continue Reading…
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