Why $100 Oil Is No Big Deal

02/28/2011 11:15 am EST

Focus: COMMODITIES

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Forget the doomsday prophesies: triple-digit crude won’t slow us down much, writes Elliott Gue, editor of The Energy Strategist.

Every time crude oil nears $100 per barrel, you can count on the media to focus on how rising prices at the pump are pinching consumers. These days, pundits describe $100 oil as a major “tax” on the consumer that endangers the nascent economic recovery.

Although higher energy prices will weigh on consumer spending, $100 oil isn’t some wild card that will suddenly wreck household budgets. US consumer spending hasn’t returned to the robust levels witnessed during the credit boom, but American shoppers have exhibited few signs of concern about energy prices.

The Bureau of Labor Statistics (BLS) estimates that motor fuel accounts for just 4.5% of total US consumer expenditures. Household fuels—heating oil, natural gas, and electricity—account for another 5% or so of total consumer expenditures, but the number of consumers using oil for heat continues to decline. Meanwhile, natural gas prices are depressed, and December electricity prices were down from a year ago. Overall, household fuel costs rose just 0.8% year over year.

As much as Americans gripe about rising oil prices, the average urban consumer doesn’t spend much of his disposable income on gasoline. Individual circumstances vary from the averages used by BLS, but rising fuel prices aren’t the driving force of consumer spending that some assume them to be.

The average American consumes about 23 barrels of oil per year, including oil used for transportation and that used by industry in plastics and other products. If oil increases to $105 per barrel from $90 per barrel, that amounts to an additional $340 in annual spending per person—slightly less than 1% of the average American’s $37,000 in annual per capita disposable income. I’m not arguing that rising oil prices and imports are good for Americans or the country, but it’s hardly a death knell for spending.

Next, The Real Tipping Point

|pagebreak|

The Real Tipping Point
Oil prices would need to jump to $120 per barrel—a distinct possibility later in 2011—to measurably affect US consumers’ spending habits. But oil would have to remain at this elevated level to have an adverse impact on the economic recovery.

Meanwhile, global oil demand is soaring. The graph below tracks it in millions of barrels per day from the mid-1990s to present.

chart
Click to Enlarge

As you can see, the world consumed less than 70 million barrels of oil per day in 1995, a figure that has risen steadily to 87.7 million barrels per day in 2010. The International Energy Agency expects demand to reach 89.1 million barrels per day in 2011.

Within this 15-year period, 2009 marked the only occasion when global consumption shrank on a year-over-year basis. Oil demand growth was particularly strong between 2003 and 2007.

Global oil demand hit a new record in 2010, increasing by 2.7 million barrels per day. That’s the fastest pace of global oil demand growth since 2004, when oil demand rose by 2.75 million barrels per day.

And this year, consumption is expected to surge by a further 1.4 million barrels per day—if these expectations pan out, 2010-11 will mark the fastest two-year growth in global oil demand in at least three decades.

The Chinese Can Afford It
Higher oil prices are far more affordable to the average Chinese consumer than just a few years ago, thanks to rising incomes and currency appreciation. Disposable income has increased steadily in recent years in the developing world.

For example, since 2005 per-capita disposable incomes in China have increased at an annualized rate, in local currency terms, higher than 12%. In US-dollar terms, this pace jumps to almost 20%.

A rapid jump in disposable income always drives demand for energy. Because personal incomes are much higher than in 2008, Chinese consumers can better afford higher oil prices today than they could in 2008. A similar logic holds in most of the major emerging markets.

[Nevertheless, expensive oil will complicate efforts to control inflation, notes Jim Jubak, who’s also picked the “Five Energy Stocks to Buy Now”. The breakout in the Energy Select Sector SPDR (NYSEArca: XLE) means the exchange-traded fund won’t face more technical resistance until the mid-80s, writes Tom Aspray. Earlier in the month, he identified a pair of lesser-known oil-service names to own for this run.—Editor.]

Subscribe to The Energy Strategist here…

Related Articles on COMMODITIES