2Jul

RETURN TO PAIN AT THE PUMP

Americans had become somewhat complacent about fuel prices in the past few years, enjoying prices at the pump that had dropped from $4.11 in 2008 to $3.64 a gallon in 2012 to $3.37 in 2014 and much further during the next three and a half years.

Those sky-high prices of 2008 through 2014, which had been putting a real dent in many people’s budgets, had resolved. Oil producers had a glut of product on their hands and OPEC had even resorted to cutting production.

That complacency can be thrown out the window now. In the past five months, gas prices have increased by 50 cents a gallon. Prices at the pump are now hitting levels not seen since 2014. It was that year that a barrel of oil last hit $100.

During a period of less than 40 years, a gallon of gas went from 36 cents in 1970 to that $4.11 high in July of 2008. The price had dropped to nearly half that by November of 2008.

OPEC’s 2014 price war brought prices down. By January of 2016, it was only $1.70, but more recently, oil prices have been on the rise.

As the price for a barrel of oil goes up, the price at the pump increases also.

In real terms, this recent increase in oil prices represents the 11th largest spike in oil prices in 70 years, year over year. Through mid-May, we have seen a 46 percent increase. The largest spike happened in the mid-seventies.

Brent crude, which serves as a benchmark price for worldwide purchases of oil, went from nearly $60 a barrel to nearly $80 a barrel in recent months.

While some try to blame increased tension with Iran as a catalyst, the real culprit can be traced to a decision by OPEC members to cut back on oil production as prices for a barrel of oil fell. In 2016, the 14 member countries of OPEC voted to curtail oil production. Even non-member Russia cut production.
Oil prices had fallen by half since the middle of 2014. That came about from a global over-supply of oil. The increase of oil production in the U.S. from shale was another contributing factor to the global supply of oil. The delayed effect of OPEC’s actions has caused a dwindling supply which has forced the price of a barrel of oil back up.

Rising Gas Prices and Inflation

Most economists view the core inflation numbers, which don’t take into consideration increases in oil prices. In very real terms, for consumers, the extra sting of a larger fuel bill every week can’t be ignored.

The increase in oil prices impact consumer prices in other ways. It increases the cost of making plastic for instance and those costs are passed on to the consumer. There is also an increase in the price to heat homes or the price to fly or take a train, which are passed on to the consumer.

During the 1970s, when the price of oil went up more than 10-fold, the consumer price index (CPI) doubled. The CPI is a key measure of inflation. But today, that relationship is less certain. Data in recent decades casts doubt on an absolute relationship.

The next meeting of the Federal Reserve in June should provide an indicator of the Federal Open Market Committee member’s concern about gas prices and if they will be a stimulus for inflation.

For the consumer though, that pain at the pump means less dollars for other things


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