The Economic & Sentiment Damage of $4.00 Gasoline (UGA, USO, XOM)

With West Texas Intermediate Crude challenging $105 per barrel now, it is time to start assessing the threat of $4.00 per gallon in gasoline.  The summer driving season is usually a threat to gas price stability and gasoline is now averaging above $3.50 per gallon.  In some cases, it is here and the threat is reality.  Right before the long weekend I had to fill up the tank, and while it was premium unleaded the price was over $4.00 per gallon.  That is in Houston, one of the oil capitals of the world.

It is likely going to take more than $3.50 per gallon at the pump to derail the recovery, but what about $4.00 per gallon?  If you look at the one-year chart from GasBuddy you can see that gasoline prices rose and rose from mid-February right up into May.  Gasoline peaked out at almost $4.00 per gallon and then things start heading down in the broader economy.  Remember “Sell in May and go away!” as far as the stock market?

While many of the reasons may be coincidental, the tie to oil is just very difficult to ignore.  High oil prices have a twofold impact.

The first impact comes from consumers spending more on gasoline and then they have less to spend on other consumer goods that drive the economy.  Higher gasoline price act as a tax, and a regressive tax that hurts middle-income earners and low-income earners the hardest.  The figure widely used by the media is that each penny of higher gasoline price takes out over $1 billion from economic spending each year.  So the difference of $4.00 gasoline versus $3.00 gasoline is over $100 billion in consumer spending.

The second (and arguable even worse than the first) impact is the psychological damage of high gas prices.  When consumers are paying more and more for gasoline, the start to slow down on their spending purchases elsewhere.  It can impact what consumers buy at the grocery store.  A person’s daily spending habits can change.  As far as big-ticket items, those start to get put off even more.

T. Boone Pickens was calling for oil prices just last week.  Iran is effectively off of the Western market now.  The United States Gasoline Fund LP (NYSE: UGA) is up almost 0.7% at $55.43 and the United States Oil Fund (NYSE: USO) is up almost 1% at $40.13.

Exxon Mobil Corporation (NYSE: XOM) is believed to be a winner with high oil prices, even if refining margins and incredibly low natural gas prices are pressuring its  margins and earnings.  Still, Exxon Mobil shares are up 0.8% at $86.32 and that has the stock within $2.00 of a 52-week high.  This stock peaked around $95.00 per share during the 2007 to 2008 oil bubble.

Margin requirements for traders to speculate in metals and energy futures were recently lowered.  Maybe it is time to raise those back up.  Last week the feeling was that $4.00 was just a threat.  Now it is becoming a reality.

JON C. OGG