High oil Prices are Now Oozing into the Entire Economy

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May, being a hard act to follow
God created June…

Peak this…peak that…

This just in from a Dear Reader, throwing our own words back in our face:

“‘Now, it appears that the gains from mechanization, bioengineering, chemistry and land clearing may have reached their limits. We may soon reach Peak Food’

“Now, let me ask: Has the DR morphed into a Marxist newsletter or something?”

Another reader was more flattering…

“Your writing reminds me of H.L. Mencken, after he had his stroke. But seriously, the one thing that marks human history…above all else…is the constant rise in population and the constantly improving technology to support it. I don’t see any reason why that basic theme should change. Peak Food? Don’t trouble yourself about it…”

Don’t worry about us, dear readers…we have not lost a wink of sleep to the peaks…neither Peak Oil nor Peak Food bothers us. No, it is not the peaks that disturb our sleep…it’s the valleys.

As our Dear Reader points out, we’ve faced peaks before. Many of them. Somehow we’ve made it over them – and then scooted down the other side. That’s how history works – like topography. Peaks, valleys, and broad, fertile plains. What more could you ask for?

We’ll return to the Peaks in a moment…but first let us look around…and get the lay of the land.

Oil sold off last week…and ended at $127. Gold rallied on Friday, but still ended the week considerably down.

Last week, we thought we saw an important break in the terrain. Speculators were betting that the Fed would reverse course and begin raising interest rates. This boosted the dollar, whacked gold, and sent the bond market tumbling. Lower bond prices come with higher yields; soon, the economy begins to sulk as if it had been punished.

“US mortgage rates leap ahead as investors bet on move from Fed,” is the headline in the Financial Times this morning. Thirty-year fixed-rate mortgages rose above 6% for the first time in nearly three months; jumbo mortgage money cost 7.21%. Ten-year notes, meanwhile, fell to yield more than 4%.

Ain’t markets wonderful, dear reader? All that hard work that the feds have been doing – all designed to keep rates low so that people would borrow more money; it can all be undone by a day’s trading!

“The surge in mortgage rates will make it more expensive to buy homes and less likely that existing homeowners will be able to refinance mortgages. That in turn, is likely to dampen hopes of an early recovery in the US housing market,” explained the FT .

What went wrong?

Ah…remember the “crude oil vigilantes?”

When the Fed began cutting rates last September, the price of oil shot up. High oil prices are now oozing into the entire economy…greasing up prices for everything from cucumbers to diapers. And the trends that held consumer prices down for so long are shoving them in the other direction. Labor costs were forced down, for example, as hundreds of millions of Asians entered the worldwide job market. But now those laborers are cooking with gas…and driving automobiles…and eating regular meals – competing with Americans for food and energy, and driving up prices even as the U.S. economy goes into a slump.

Here is the latest from the Associated Press :

“Indonesians are staging protests against shrinking gasoline subsidies in a nation where nearly half the population of 235 million lives on less than $2 a day. And there are now 887 million vehicles in the world, up from 553 million vehicles just 15 years ago, and on track to nearly double to a billion by 2012, according to London-based consultancy Global Insight.

“So as oil prices have soared, average U.S. [gasoline] prices have gone up 144 percent in the past five years – from $1.67 in May 2003 to $4.02 a gallon this month, according to the U.S. Energy Information Administration. Over the same period, gas prices in France went up 117 percent to $9.66 a gallon.

“Proposals by U.S. presidential candidates John McCain and Hillary Clinton to suspend federal gas taxes this summer would lower the price tag – but have little effect on the underlying oil price. French President Nicholas Sarkozy has urged the EU to cut value-added tax on fuel.

“French fishermen and farmers, who need fuel for their trawlers and tractors, say their livelihoods are threatened by soaring prices and have blocked oil terminals around France and shipping traffic on the English Channel to demand government help. Italian, Portuguese and Spanish fisherman joined them and went on strike Friday. British and Bulgarian truckers are staging fuel protests, too.

“Turkey faces similar problems – and even higher prices – $11.29 a gallon, which for a full tank in a midsize car can reach nearly $200, enough for a domestic plane ticket.”

This is just the tip of the iceberg…

How do people deal with higher gas prices? Of course, they economize. In the Philadelphia area, for example, Triple A reports that they buy less gasoline…and then run out. AAA is getting twice as many calls from stranded motorists with empty tanks.

Consumer confidence is out of gas too – at its lowest reading in 28 years. And no wonder; house prices are still falling…while consumer prices are going up much more quickly than CPI numbers suggest.

On the housing front, the Boston Globe reports that some nearby cities have seen property prices fall by as much as 33% in the last year. And the New York Times adds that the housing problem is “trickling up” to the upper middle class. It may have begun with marginal subprime borrowers, says the paper, but now even expensive houses in good neighborhoods are getting marketed down…and taking much longer to sell. God forbid that you need to sell in a hurry; sellers have little bargaining power.

And thank God for those rebate checks. They’ll buy nearly 300 gallons of gasoline for every man, woman, and child in the country. That ought to keep the nation rolling for a bit longer…

*** Back to our theme. What was it? Oh yes, Peak Food. Well, we won’t actually have anything to say on the subject until later in the week. For today, we merely observe that people are ready to believe practically anything. In the early ’70s, they seemed to believe that we would all “starve…in the dark” as the world ran out of vital supplies. Then, in the ’90s (and still today) most people came to believe that there is nothing to worry about…that new supplies will always come forward just when they are needed.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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3 Comments on "High oil Prices are Now Oozing into the Entire Economy"

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christina
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What I think is also very worrying is the “peak panic” that will one day hit. Rich Dad said to Robert Kiyisaki that “when the gap betwen the haves and the have nots becomes too great, all hell will break loose”

Curt
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The only think peaking are the flowers. High oil prices and commondities are here to stay.

Dan
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Picking price peaks and troughs of anything is pretty darn difficult. You can justify your guesses to a certain extent, and some folks must be better at it than others, but it all seems a bit black magic to me. That’s not to say you can’t state that something is overvalued and will come down in the future – it’s just that the nature of markets makes it next to impossible to say exactly when. Take USD (please – ba dum bum). I’ve been watching it sink since 1.20 euros or so. And at every .1 interval I thought to… Read more »
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