Gasoline Prices near Highest Level of the Year Despite Seasonal Drop
As summer comes to a close and demand for fuel typically decreases, gasoline prices in the United States are defying expectations by reaching their highest level of the year. The increase in prices can be attributed to aggressive oil supply cuts in Saudi Arabia and Russia, as well as deadly flooding in Libya, which have caused crude oil prices to soar. On Friday, oil prices reached a 10-month high and are expected to experience their largest quarterly increase since 2022.
The rise in oil prices is concerning for Wall Street as it indicates higher inflation and the potential for the Federal Reserve to implement interest rate hikes, which could negatively impact the economy. Furthermore, higher gasoline prices typically lead to reduced consumer spending in other areas and increase the risk of a recession. With other existing concerns, such as the ongoing strikes by auto workers, the possibility of a government shutdown, China’s subdued economy, and geopolitical tensions, the question remains whether rising oil prices will exacerbate these issues.
David Kelly, chief global strategist at JPMorgan Asset Management, however, believes Americans should not be too worried. He points out that there are several factors that could prevent a significant increase in oil prices in the next year or two. Firstly, while prices may seem high now at $90 per barrel, when adjusted for inflation, they are actually lower compared to prices in 2008. Additionally, the US has reduced its Strategic Petroleum Reserve and is currently producing more crude oil than both Russia and Saudi Arabia. This trend is expected to continue, with US liquid fuel production reaching record levels this year and projected growth for next year.
Furthermore, the green energy transition and slow global economic growth are limiting the demand for fossil fuel energy. Kelly believes that while there may be occasional shocks that cause oil prices to spike, economic trends are unlikely to push prices much higher.
Expensive oil has historically been connected to recessions due to its triple effect of increasing inflation, tightening monetary policy, and reducing consumer spending. The 1970s oil crisis and the Great Financial Crisis of 2008 are prime examples of how high gasoline prices negatively impacted the economy. However, Kelly does not believe that the current situation will lead to a recession. He hopes that the Federal Reserve will not overreact and implement interest rate hikes in response to the increase in oil prices. Kelly believes that inflation will remain below the Fed’s target of 2% by the fourth quarter of next year.
In the meantime, investors are advised to look for opportunities in the energy transition and consider investments beyond fossil fuels. The recent spike in oil prices serves as a reminder that the control of oil prices by countries like Saudi Arabia and Russia can have adverse effects on the United States. Additionally, higher gasoline prices increase the risk of a recession, so investors should take a more defensive position.
In other news, the United Auto Workers’ strike against General Motors, Ford, and Stellantis has brought attention to the idea of shortening the workweek. Union members are pushing for a 32-hour, four-day workweek with no pay cuts. This proposal has gained traction in recent years, especially with the increased flexibility of remote work due to the pandemic and the growing use of artificial intelligence in the workplace. Senator Bernie Sanders has been a vocal proponent of a shortened workweek, citing the expected increase in productivity brought about by AI and robotics.
Finally, Signet Jewelers, the largest jewelry company in the United States, has reported a decline in engagement ring sales due to the pandemic’s impact on relationships and socializing. However, as pre-pandemic lifestyles resume, including dating, Signet predicts that the decline in proposals will bottom out this year and that engagement rates will rebound starting in early 2024.
Overall, despite the current increase in gasoline prices, experts remain optimistic about the long-term outlook, pointing to factors such as increased US oil production and limited demand growth for fossil fuels.