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At What Point Does a Fuel Crisis Hit us Again? $

CrudeOil InvtoSales020613Brent North Sea Crude prices are hitting nearly $117 a barrel today. The chart at right from the NASDAQ shows the five year history of Brent North Sea Crude and we can easily see that it is nearing four year highs (the spike to $147 a barrel in 2008 being the peak). But, today’s price near $117 per barrel is just three dollars per barrel higher than the $120 per barrel post-recession highs we saw in early 2012.


Think back a bit to the price spike in 2008. At the time, more than 4,000 trucking companies in the United States went out of business because they ran out of cash and couldn’t fill their trucks. Rail companies saw a spike in activity as global supply chain operators made adjustments in how they carried inventory and what modes of transportation they used (moving to cheaper modes such as rail). At the time, companies stockpiled more raw materials and product inventories to help reduce the impact of rising fuel prices on product cost. We have shown you the chart at right numerous times regarding the change in inventory carrying practices prior to the Great Recession and since. One can see the sharp spike in inventory levels in the fall of 2008 and the steep drop-off immediately following.


Here is one potential scenario that we would all be subject to:


  1. Today, corporations are sitting on very low inventories. Just-in-time inventory systems are in vogue and transportation companies are seeing smaller shipment sizes, but more frequent shipments.
  2. Assume that oil prices continue to move up and the price of fuel increases. More companies would quickly shift to ordering larger quantities so that they could stockpile resources while at lower prices – minimizing the impact of higher fuel costs. That would create a burst of economic activity – one that would further “fuel” an increase in consumption and raise the speculation premium on oil prices in the process. That process then would continue to feed on itself. We saw this same exact process play out in 2008. At the time we had the housing crisis which led to the financial crisis to push us over the edge and create the Great Recession. But, the pressure on consumers and businesses came at the hands of a super-spike in oil prices. We aren’t predicting a 2008 scenario and another recession. Financial, banking, and housing markets are very different today after the recession shake-out.
  3. At some point, inventories will have grown to a level that outpaces sales – and the order cycle shuts down abruptly as it did in 2008. Companies would be sitting on high inventory levels and demand for those items would slow because consumers are spending more on gasoline and energy, higher food, and retail product costs (because transportation costs had moved up).


Here’s the impact: First, we will see increased activity in the petroleum production industries world-wide – and after about six to eight months of increased oil prices – production will catch up and prices would start to ease. Economically surviving that six to eight month lag is the key.


Second, watch for a renewed push for more fuel efficiency in vehicles and commercial applications. Media headlines will once again be fraught with discussion about alternative fuel vehicles and ways to conserve on fuel costs.


Third, consumer spending will suffer a bit. If nothing else, the mental pressure on consumers will create some changes in spending patterns. If we see WTI eclipse the $100 per barrel mark – it will make national news and the media will be all over it as a major story – and that will weigh on consumers. We saw some of the mid-range restaurants in the country take the biggest hits in 2008 – that would happen again and would be just the tip of iceberg.


All commodities will increase in price because of a rise in fuel prices and general petroleum input prices.


Lastly, watch for the potential for certain countries to use this opportunity to “stick it” to the West. An attack on an oil infrastructure system (such as the Suez Canal, Strait of Hormuz, or pipeline infrastructure) could push oil prices back into the $150 range. It wouldn’t take Brent much to get there and even WTI is already in the $100 per barrel range. There is already upward pressure on prices – it wouldn’t take much to get the stock market and investors playing the risk premium on crude oil.


We don’t want to overplay the importance of this trend – but we also don’t want to underplay it if there is a real risk starting to emerge because of rising fuel prices. Several prominent economists (Zandy for one) has started to send up warning signals about rising fuel prices and the impact on the consumer. It is something that we need to pay attention to – and we are all affected by it.

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