Surprise: Oil Prices Go Up, Spending Goes Down

After reading what the International Energy Agency had to say about oil prices and their effect on the global economy, I could think of only one thing to say. Are these guys serious? In a classic case of “Duh, maybe they got something here,” the IEA's Governing Board issued the following statement:

Despite a near -10% correction since May 5, oil prices remain at elevated levels driven by market fundamentals, geopolitical uncertainty, and future expectations. The IEA Governing Board expressed serious concern that there are growing signs that the rise in oil prices since September is affecting the economic recovery by widening global imbalances, reducing household and business income, and placing upward pressure on inflation and interest rates.

Wow, this Paris-based organization -- which lists 28 member countries, including the United States -- really went out on a limb on this one. Who knew most households were being squeezed by rising energy costs?

The IEA touts itself as an “international forum for sharing information and ideas on the rational management of world energy resources.” It warns in the statement, from its quarterly meeting last week, “As global demand for oil increases seasonally from May to August, there is a clear, urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market.”

Hmm, very interesting. Tight supply is causing prices to rise. Let’s read on. The IEA Governing Board’s continued:

Additional increases in prices at this stage of the economic cycle risk derailing the global economic recovery and are neither in the interest of producing nor of consuming countries. Oil importing developing countries are most likely to be seriously affected by high oil prices, undermining their economic and social well-being.

All kidding aside, the statement concluded with the IEA’s Governing Board urging action from oil producing countries to increase supplies to “help avoid the negative global economic consequences which a further sharp market tightening could cause.”

Consumers and investors in the United States and elsewhere don’t need official statements to know higher oil and gas prices are draining consumer confidence. According to the latest US Energy Information Administration report, the average retail price for regular-grade gasoline in the US was $3.96 a gallon on May 16, up nearly $1.10 a gallon from a year ago. Regular gas was selling for $4.22 a gallon last week in California and $4.14 a gallon in New York -- more than $1 more per gallon from last year. There’s more than a 40% probability that the national monthly average retail price for regular gasoline could exceed $4 per gallon by July, the EIA reports.

The Bloomberg Consumer Comfort Index declined from minus 46.9 two weeks ago to minus 49.4 last week, the worst reading since last August. Gary Langer, president of Langer Research Associates LLC, which compiles the index, said in a statement, "Blame gasoline prices. Consumer sentiment suffers when gas rises steeply for an extended period."

The National Association of Realtors reported home sales surprisingly fell nearly 1% in April. NAR blamed tight credit. But I blame fuel prices. I’ve heard from numerous real estate professionals that high gas prices, and the resulting belt tightening, is dampening buyer activity.

But don’t lose hope, because everything is subject to change. Less than a month ago, some predicted $6 gas could happen if the dollar keeps getting weaker. Now some experts say gas prices could fall to $3.50 by Memorial Day. So take the advice of oil and gas experts at your own risk.

Commodities prices are difficult to predict. All we can do is consider the odds. Prices will stay high if supplies remain tight as a result of political unrest in the Middle East or tropical storms in the Gulf of Mexico. But if we’re lucky, things will be calm and prices will fall.

If energy prices fall, consumer confidence will rise. The economy will grow. Investors will breathe easier. That’s what I’d like to see, because the alternative isn’t very pretty. If gas prices go higher than $4 a gallon -- and stay there -- confidence slides, the economy stalls, and we slip back into recession. And guess what? We don’t need an official statement from the International Energy Agency to tell us the obvious.