Oil Prices Could Not Be Sustained

This most recent price drop in oil, and ultimately the price of a gallon of gas is a bit interesting. I think it says quite a lot about where the economy really is right now, and to what extent we are in recovery. I also think it means oil prices will continue to go down, not up. The truth is consumers are still tapped out. Jobs numbers may be slowly bouncing back, but just because more people are back to work does not mean those same people are caught up financially, nor that they will have much in the way of disposable income. People are going to pull back where they must in order to save money. And because oil is so closely tied to every other thing we buy, people will have to pull back not just on driving, but on other things as well.

This pullback is showing already in a decline in miles driven and gallons of gas sold. I think the fact that we got to a pullback on consumption of gasoline so soon is telling. Oil prices simply could not be sustained. People cannot afford the additional cost. Granted, I've made the argument that oil is perhaps one of the most important commodities in the United States, and when you value it against its current prices, even the higher prices, it seems rather cheap. I've made comparisons to a 20 oz. bottle of Coke which runs around $10 per gallon, and 5-Hour Energy which sells for as much as $192 per gallon. Still, the reality is that while the actual prices of those things are much higher than gasoline, we don't consume those items in the same quantities that we do of gas, and so inevitably the price of a gallon of gas is going to take a bigger, more hurtful chunk out of our wallets, and as a result, it is going to cause us to have to make some decisions as it relates to spending. Certainly it gives us cause to make decisions about driving.

The result? We won't likely see $5 per gallon of gas anytime soon. And I think if we do see gas rise to $5, there will be a major spike downward in gasoline consumption, and I think discretionary spending goes out the window, spiraling us into an interesting dynamic of very, very slow economic growth, higher savings rates by Americans, and lackluster consumer demand. In a way, we're kind of in this mode right now. But I think if we can keep prices down, we can have better growth going forward. Not great growth. But better growth than what we'd see if gas prices were to run up to $5, because obviously that cost would trickle upward eventually into especially food prices, and it just is not possible for Americans to have their two highest expenses see dramatic cost increases and have any possibility of any significant growth in the economy.

Again, the folks are tapped. What's that old saying? You can't get blood out of a stone. Prices will have to be adjusted to what the market is willing to bear. And right now that's not a lot. So, companies will have to go back to the drawing board and draw down their margins and look for better ways to create jobs for Americans despite it all (because without jobs there'll be no growth), and they'll have to get really creative in how they do this profitably. No more are the easy days of easy decisions to simply move work out of the country and take away people's pay and benefits. Government has tossed as much money as they can into the economy. Now its time for corporate dollars to make it into the hands of Americans through work. There's simply no other way. Corporations need buyers. Buyers need money. It really isn't rocket science is it?