Tuesday, February 22, 2011

How will a 25% increase in the cost of gasoline before the summer affect you?

By Nick Sorrentino

As I write this I see that crude oil prices just jumped 7% on news of unrest in Libya and in the rest of the Middle East. As of this moment oil is trading just south of $100/barrel.

In the summer of 2008, just before the precipitous stock market crash, oil prices spiked to over $140/barrel. This was one of the main reasons the so called “Great Recession” began. Gasoline prices crested above $4.00 a gallon and everyone from commuters to industry felt the hammer of expensive fuel come crashing down. People drove less. The cost of shipping went up. Prices of houses in the exurbs went down even more as people began to realize that $1.20 gas was gone forever. Exurbanites had to come to terms with the fact that their 50 mile commute was going to cost them a fortune, as if it didn’t already. Chevy Suburbans went up for sale across America. Then the economic chasm opened and the price of oil fell with the stock market and the housing market.

Many people survived that first oil shock by paying for the newly expensive fuel with credit. Money was still relatively easy, and the vestiges of the housing boom still existed. In 2008 the banks hadn’t reigned in home equity lines. People were still able to move balances around on credit cards and even transfer them to 0% interest cards without much trouble. Nowadays this is not the case.

For the American consumer, which is represented mostly by the middle class, the easy days are gone. For nearly 2 years we have heard that recovery is “right around the corner.” Remember “Recovery Summer” as pitched by Vice President Biden? That was last year.

Many people have adjusted to the new realities of a limping economy. This is the light the will help us find our way out of the economic darkness. People are starting businesses, even with little help in terms of capital from the banks. This is a fantastic thing. Household debt burdens are decreasing, which is also good. Interest rates for the time being are low, if you can in fact get the money. There are many things to be positive about.

But an updraft in the price of fuel could do much to challenge the “organic recovery” I think we are seeing on a household level. People have to get to work. Gasoline is not an option, especially in a place such as Culpeper. ( I wrote this for the Culpeper Star Exponent originally.) If a family is on the edge now a big bump in their fuel bill will be paid from funds usually allocated for other things, such as food.

But before we get all riled up about what the folks in the Middle East are doing to our monthly finances we should acknowledge that the Federal Reserve also isn’t doing us any favors. By printing money at the rate it currently is the Fed is forcing commodities priced in US dollars to increase. Oil is priced in US dollars. It’s not all Middle Eastern revolution. Much of the blame for the surge in oil prices (and in groceries for that matter) can be laid right at the feet of Chairman Bernanke.


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About Me

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Nick Sorrentino is the Editor of The Liberty and Economics Review and CEO of Exelorix.com a social media management company.