The general consensus is that economic disparity and prosperity or, lack thereof will be the primary focus of this year’s elections. The primary components of these discussions will be gas prices, unemployment and the federal deficit, which includes the entitlement programs and taxes. We will take a brief look at each of these over the next few weeks as we run through the primaries and the 2012 election begins to take shape.
Job programs, tax breaks and legislation do not have the immediate impact or direct effect financially or psychologically as gas prices. The unrest in Iran due to their pursuit of nuclear technology has caused the price of crude oil to rise more than 11% in the last month. The national average for gasoline has risen by nearly 13% over the last year and now stands at $3.56. The real issue here is that we’ve yet to approach the peak driving time of Memorial Day weekend. At these prices, the average historical seasonal increase around 12% could tack on more than $.40 per gallon pushing the national average to $4. This would make filling up the tank a $70 proposition for many drivers and push the average monthly outlay towards $200 per month.
Much of this spike is due to European Union economic sanctions on Iran. These actions were fully supported by the United States while Russia and China were the only dissenters among the E.U. Security Council vote. Iran’s retaliatory response was to halt shipments of oil to France and Britain. This is akin to a child’s toy being taken away with the child’s response being, “I didn’t want that toy anyway.” The sanctions prohibit financial dealings with Iranian banks making it impossible to broker a deal for shipments of oil in the first place. The geopolitics of the event solidifies Eastern European and Asian alliances for the world’s fourth largest producer. Oil revenues account for 50% of Iran’s GDP. Therefore, they must find a market for their oil or face a domestic political nightmare.
Here in the U.S. the President is going to have to face some tough choices. High gas prices impart a very real feeling of inflation on the vast majority of the voting public. Even people not directly affected by higher gas prices will cringe when filling up. Meanwhile, the rest of us will be forced to alter our plans to accommodate rising expenses.
The tangible impact of this will bring energy policy to the forefront of the primary debates among his challengers. Thus far, President Obama has been reluctant to spur domestic fossil fuel production and infrastructure improvement. This stance is clearly reflected in his unwillingness to open domestic drilling in Alaska and the Gulf and further reinforced by his unwillingness to support reversing the Keystone pipeline. Lastly, will he choose to tap the strategic reserves as he did last June? This will dampen gas prices in the near term but what will replacing that oil on the open market cost in the future?
The United States is moving towards the path to energy self-sufficiency. It has been 20 years since the U.S. has consumed as much domestic energy as we did in 2011. This proves that we are on the right path and that’s a good thing as developing countries like China and India begin to hoard oil to create their own strategic reserves which will continue to bite into global supply well into the next Presidential cycle. Therefore, Republican challengers must be able show that their plans to spur domestic production will be done in a taxable and environmentally conscious manner.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.