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Forecasts that oil will hit $100 barrel happen regularly now because of the war in the Middle East and the shuttering of the Strait of Hormuz through which 20% of the world’s oil flows by ship. If 2022, after the start of the Ukraine war, is any indication, $100 brings $5 gas. People forget that the CPI rose 9.1% in June of that year, which caused panic among some economists.
A headline in the FT today read, “Why oil at $200 a barrel is no longer unthinkable.” The author continued, noting that Stifel’s analysis reminded readers that crude oil reached a peak of $147.27 per barrel on July 14, 2008. The analysis showed that this would translate into $222 in today’s money. The reason for the high rate was not complicated. Supply and demand were at the heart of the problem. However, so was the volatility of crude, according to commodity traders.
Qatar shut down its gas liquidation operations today and said it would take weeks to reopen. It supplies 20% of the world’s LNG. Ships may not transit the Strait of Hormuz for weeks, if not longer. Iran has the chance to attack oil fields and production facilities. France24 recently reported that, in Saudi Arabia, “One of the world’s largest refineries, with a capacity of over half a million barrels of crude oil a day, was temporarily shut down as a precaution.”
$200 oil does not immediately cause $10 gasoline. It certainly takes the price much, much higher than $5. The CPI carries a heavy weight of oil and gas, which were the primary components of the June 2022 number.
How much will the US economy bleed if the CPI goes to 12%, 13%, of 14%. That answer is that it would partially wreck consumer spending and the financial health of some businesses and industries. Consumer spending is 70% or more of GDP. Gas prices are about 4% of household spending today. That figure could rise toward 8%
American consumers say their budgets are already stretched and that the statements from The White House about inflation are wrong. They could get much wronger.