The resiliency of consumer spending in the face of
high-energy prices has surprised many observers. The modest impact high-energy
prices has had on spending has been mustered by some economists as proof of the
resiliency of the economy. If $65 Barrel Oil doesn’t hurt spending, than this must
be a robust economy, they argued.
Unfortunately, that issue has now been resolved – to the
downside. With Target’s announcement last week, and Wal-Mart’s dour guidance
this morning, there can be little doubt that high-energy prices are impacting
Up until now, the negative economic drag has been hidden by
the bifurcated nature of U.S. consumer. High gas prices may be a mere annoyance
to the high-end shopper (Tiffany, Neiman Marcus, Coach), but to consumers who
frequent the discounters (Costco, BJs, Wal-Mart and Target) the added energy
expense significantly crimps spending. Budget-minded shoppers simply cannot
shrug off $3/gal gasoline.
We’ve argued that energy prices, adjusted for inflation, are relatively cheap. However, the chart nearby has given us reason to rethink that position. By inflation
adjusting Gasoline prices going back to 1920 (rather than Oil just to the
1970s), makes gas prices appears rather dear.
This implies that the 1930s price hikes and the even more
significant 1970s spike were aberrations, caused by factors other than supply.
It makes one wonder whether the 2003-05 run up is similarly aberrational and
unsustainable. The problem in reaching this conclusion is whether we are on the
backside of the Peak Oil slope, or how an eventual mean reversion can bring
prices back towards “normal.”
I expect that Oil prices will revert – at least partially -
towards prior altitudes once demand drops from the current amount. We
previously mentioned an excess of Fed tightening will likely induce a real estate
slow down, and that could cause a hard landing. The end result of that slow
down will be reduced demand for Oil, and lower fuel prices.
Looking once again at this chart, we note that historically,
it takes a long interval before gas prices see that mean price reversion
towards previous prices. The two major spikes (1930s, and 1970s) each took the
better half of a decade to retrace.
With Oil prices at present still in an
uptrend, this implies that real prices of oil at $30/barrel may be a phenomenon
no sooner than 2010.