Market Overview

Will $5 Per Gallon Gas Sink the US Economy in 2012?

Even if $5 per gallon is not in our immediate future, it would appear that the mainstream media is working to get the American populace to mentally prepare for such a reality.

Various news agencies are reporting that some analysts are saying that we could see $5 per gallon gasoline prices in 2012. Such sentiments are quite ominous for the US economy going forward. Whereas many households are currently being stretched to the limit by rising food prices, additional fuel costs could very well end up significantly harming economic growth in the US. If gas prices rise in 2012, at that point we can probably forget about an economic recovery.

On Jan. 2, 2012, both CBS Baltimore and the ABC affiliate in Baltimore in separate stories discussed the prospects of higher gas prices. CBS Baltimore: "Just this weekend, [President Obama] signed new sanctions against the country of Iran. Now, Iran is firing back with a threat that could send gas prices higher than ever. Prices at the pump already have drivers in pain." ABC News Baltimore: "GasBuddy analysts are expected to release their 2012 projection in the next two weeks, but early indications shot this year may see the highest ever recorded prices at the pump, and has the potential to reach $5.00 per gallon if conflict arises in Iran."

On Jan. 5, 2012, CBS New York followed suit in discussing the ominous specter of rising gas prices. CBS New York: "Things in the Middle East, while never good, have gone from bad to worse." It would appear that recent economic sanctions against Iran and increasing tension in the Middle East may portend higher gas prices at home. CBS New York also warned that "[m]ore expensive fuel translates to more expensive food and consumer goods, and even has an impact on home values" -- thereby potentially bringing any economic recovery to a grinding halt.

On Jan. 6, 2012, MarketWatch's Myra Saefong commented on how "[g]asoline prices at the pump started the year off with a bang -- at the highest-ever level for the start of the new year, and analysts expect a particularly volatile 2012." Saefong claimed that early rising gas prices portend a rough year for consumers "because retail gasoline prices typically don't peak until April to July." Whereas gas prices appear to be more linked to changes in Brent crude than Texas light sweet, according to Jeff Lenard of the National Association of Convenience Stores, "for every $1 increase in oil prices per barrel, consumers can eventually expect to see a 2.4 cents-per-gallon increase in retail gasoline prices." West Texas Intermediate crude is currently trading at $101.56 per barrel.

Saefong had quite a dire forecast for US consumers in 2012: "[C]onsumers are already staring at triple-digit prices for oil and can count on uncertainty in global oil supply and demand to potentially give them whiplash when it comes to gasoline prices at the pump this year." If problems with Iran were not enough, natural disasters including hurricanes, refinery maintenance shutdowns, and summer demand could drive oil prices higher.

It is significant to note that this is not the first time that analysts have made these sorts of predictions. In May 2011, the New York Post warned that Goldman Sachs' analysts believed that Americans would be paying $5 a gallon gas in the summer of 2011. From the same article, JPMorgan predicted that oil would rise to $130 during the same period.

In yet another story from MarketWatch's Myra Saefong on Jan. 6, 2012, there may be options for small and large businesses to lock in cheaper gas prices, i.e. a hedging program. According to the article, "Pricelock has teamed up with Wright Express Corp. (NYSE: WXS) and offers some programs for smaller fleets, US car companies, etc." With this program, customers set the price for gasoline, the quantity, and period for the gas-hedge, and then pay a fixed fee for the plan. "If prices go above the selected fuel price, Pricelock pays the difference and if prices drop, the business is not locked in and can enjoy lower prices at the pump."

Where price-hedging programs for businesses and other various "fuelperks" programs for consumers may reduce a portion of the sting from having to pay more at the pump, these programs do little to remedy the underlying issues behind high gas prices, i.e. tension & social unrest in the Middle East, increasing global demand, and a civilization that unfortunately requires oil in order to function.

If gas prices do rise to $5 per gallon in the US in 2012, we can be sure to expect political and societal implications. According to an article from Investopedia's Financial Edge, high gas prices can have significantly adverse effects on an economy. From the article: "A very basic side effect of high gas prices is that discretionary spending goes down" -- this means that "shoppers will drive less to conduct their purchases" and the pinch will be passed on to retailers. Meanwhile, retailers and businesses who have to pay more for transportation costs, will pass those costs back on to the customer. The auto industry would also be affected as there may be increases in individuals' use of public transportation. Further reverberations could be felt in limiting school or work weeks, hiring, and the spurring of new businesses.

Perhaps one of the biggest effects of $5 gas prices would be a significant drop in consumer confidence: "[T]here is, at the least, a correlation between consumer confidence, spending habits and gas prices." While many feared that gas would rise to $5 or $6 per gallon in 2011, there is always the hope that perhaps Middle East turmoil will subside and growth will set in keeping gas prices stable allowing the global economy to recover in 2012.

However, if gas prices do rise in the not-so-distant future, the mere sticker shock of $5 during the summer of 2012 could be enough to effectively shut down the US economy. As I have written previously, "[A] significant rise in oil prices can burst. Owing to the interplay of commerce and energy usage, there appear to be practical limits to how high oil and gas prices can go before the economy simply shuts down."

As I can recall living in Northeastern Ohio in the summer of 2008, owing to gas rising above $4 per gallon, we reached a point where people began sweating bullets and panicking over the price of gas. Some feared not being able to afford to get to work; businesses feared not being able to function; some were afraid of having to choose between getting to work and eating. As time has passed, we have become a bit accustomed to high gas prices.

Even so, with the interplay of commerce, supply, and demand, gas prices have their respective limits. Obviously, were there to be military conflict in Iran resulting in gas prices in the US skyrocketing from $3.50-$4 per gallon to $8-$9 per gallon, even in the heat of summer, economic activity and commerce would probably freeze up in a sudden chill. Were gas to rise to the tune of $8 to $9, the economic effects could possibly devastating owing to a collapse of commerce, travel, and disposable income -- particularly in those regions of the US without established public transportation systems.

In such an instance, you could probably kiss a US economic recovery goodbye; you could also probably kiss the 2012 holiday season goodbye as well. Though businesses could still use Skype and e-mail to operate, the day-to-day functions of businesses and flow of commerce would be disrupted in the event of sky-high gas prices. While it is unlikely that gas prices could remain $8 or $9 per gallon for an extended period of time, by the time gas prices subsided, the damage would already be done; sky-high gas prices would probably force American society to radically restructure the way we live, move, and work. The issue of how American society could restructure itself with $9 per gallon gasoline in a short amount of time is a topic I hope to explore another day.

Taking the volatility of oil, global tumult, and societal commerce & economic functionality into account, it's all enough to make one wish our cars were fueled by "spice" or something. Of course, any other such commodity would probably bring with it problems of its own.

ACTION ITEMS:

Bullish:
Traders who believe that we will see $130 per barrel oil and $5 per gallon gas in 2012 might want to consider the following trades:

  • Check out Exxon Mobil Corp (NYSE: XOM), Halliburton (NYSE: HAL), Chevron Corp (NYSE: CVX), Schlumberger (NYSE: SLB), and Marathon Oil (NYSE: MRO).

Bearish:
Traders who believe that sky-high gas prices will leave consumers panicked thereby shutting down the economy may consider alternate positions:

  • Check out silver coins, water, rice, and stock up on canned goods.
  • And even in the event of high gas prices, those who still have a taste for "spice" as a valuable commodity could always check out Chipotle Mexican Grill, Inc. (NYSE: CMG) -- Chipotle may be the closest thing we have to the fictional commodity "spice melange" on this planet right now anyhow.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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