Home About Archives RSS Feed

Independent Investor: Oil — The New Tax Cut

Bill Schmick

On Thursday, for only the third time in its history, the International Energy Agency decided to release 60 million barrels of oil from global strategic petroleum reserves. They did so in order to "ensure a soft landing for the world economy."

As readers are aware, I suggested that investors "take profits" on oil as it soared past $100 a barrel almost two months ago. I argued that the clearing price on oil should be closer to $85 a barrel, given the slow growth of world economies. I was early in my recommendation, since oil subsequently climbed as high as $112 a barrel before plummeting to its present level of around $90 a barrel. I fully expect my price target will be reached in the coming weeks.

However, while oil dropped 5 percent Thursday, generating an annualized benefit of $36 billion to American consumers, the stock market fell by over a percent equating to a $200 billion loss. To me, that is a major contradiction. Here's why.

In energy, the rule of thumb economists often site is for every $10 increase in the price of oil, Gross Domestic Product (GDP) drops by one half of one percent. By March of this year, we had experienced a $25 hike in a barrel of oil in a very short time period. Economists were predicting that when (not if) oil reached $120 a barrel, the U.S. economy could easily fall back into recession.

Consumers bear the brunt of higher energy prices. Every one cent increase in the price of gasoline takes $1 billion out of our pockets. And actually it is much more than that (almost double) when you include things like home heating, electricity and price rises in alternative sources of fuel such as propane.

The real tipping point in impacting our consumption behavior occurs when energy prices reach 6 percent of average consumer spending, which occurred in March 2011 at 6.27 percent of spending. At that point, the top 20 percent of income earning Americans were spending 7.9 percent of their disposable income on food and energy. That may be a manageable hit for the rich, but not so for the bottom 20 percent of income-generating Americans. For them, energy and food account for a whopping 44.1 percent of after tax income. No wonder consumer spending and employment fell off a cliff.

As a result of higher energy and food prices, together with the fallout from the Japanese earthquake and tsunami, our economy has hit a soft patch which triggered the present decline in the stock markets. But circumstances have changed and in my opinion it won't be long before market players begin to realize that.

We can't have it both ways. The steep decline in oil and other commodity prices will boost consumer spending and economic growth while reducing unemployment. For consumers, it should be a matter of days before we begin to see this decline reflected in the price at the pump, in electric bills and in other areas. It is an instant and fairly hefty equivalent to a tax cut. Corporations will feel it too, but consumers benefit from that as well in the form of lower prices for products.

Right now, investors can't see the forest for the trees. With Greece threatening to collapse, unemployment rising a bit and the economy still slowing, it is hard to focus on what is just around the corner. But that, my dear reader, is exactly why I write this column — to help you focus on the horizon because there are better days are ahead.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

 

0 Comments
Tags: oil, energy      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Williamstown Releases Findings of Investigations into Police Department
MCLA Athletics To Celebrate National Girls and Women in Sports Day
Floor Sander Causes Small Fire at Lenox Inn
State Launches Commission on Clean Heat
North Adams Airport Commission Responds to Another Open Meeting Complaint
SVHC Foundation Welcomes Suzanne Anair
Meet Teachers at Berkshire Waldorf School
MassDevelopment Awards Grant to Roots Rising
North Adams to Renovate Airport Hangar
Adams Selectmen Ratify Emergency Management Director, Forest Warden Chief
 
 


Categories:
@theMarket (396)
Independent Investor (451)
Retired Investor (76)
Archives:
January 2022 (5)
January 2021 (4)
December 2021 (9)
November 2021 (7)
October 2021 (8)
September 2021 (9)
August 2021 (6)
July 2021 (8)
June 2021 (6)
May 2021 (6)
April 2021 (9)
March 2021 (8)
February 2021 (8)
Tags:
Housing Stimulus Europe Commodities Banks Election Metals Stock Market Taxes Pullback Deficit Recession Congress Oil Retirement Federal Reserve Currency Rally Euro Japan Energy Bailout Selloff Crisis Debt Markets Europe Wall Street Debt Ceiling Interest Rates Economy Jobs Fiscal Cliff Greece Stocks
Popular Entries:
The Retired Investor: The Hawks Return
The Retired Investor: Has Labor Found Its Mojo?
The Independent Investor: Don't Fight the Fed
The Retired Investor: Time to Hire an Investment Adviser?
The Retired Investor: Climate Change Is Costing Billions
@theMarket: Let the Good Times Roll
Independent Investor: Europe's Banking Crisis
The Retired Investor: My Dog's Medical Bills Are Higher Than Mine
@theMarket: One Down, One to Go
@theMarket: Quarter Ends With a Bang
Recent Entries:
The Retired Investor: A New Female Fed
@theMarket: Beware the Hikes of March
The Retired Investor: No-Shows Threaten Economy
@theMarket: Fed Meeting Notes Throw Markets a Curve
The Retired Investor: My Dog's Medical Bills Are Higher Than Mine
@theMarket: Markets Up on Thin Holiday Trading
The Retired Investor: Climate Change Is Costing Billions
@theMarket: Markets Are Heading for Trouble
The Retired Investor: Time to Hire an Investment Adviser?
@theMarket: Markets Keep Churning