Tuesday, July 1, 2008

LATimes: Life at $200 Oil

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An interesting story in the LATimes regarding life with oil $200 (I've already described many of these shifts happening within the blog - as always, we are early) Note - stories like this get me even more bearish on the near term for "energy". While I do believe the longer term trend is up, I would expect a quite sizeable correction in the coming quarter(s) - once oil really turns, all parabolic type reversals generally do not end well. (see Japan 1980s, see NASDAQ, see housing, see China) If however, I am wrong (never happens!) here are some possibilities.... I do believe for those of us who live in the Midwest and Northeast who went through that massive electricity outage for a few days in the middle of the decade - we won't really realize how dependent we are on something until it is taken away (or in this case, we're in many ways priced out of it)

Stories such as this are where I form some longer term macro views - if not for the fact we've already thought about just of all of it already ;)
  • The more expensive oil gets, the more Katherine Carver's life shrinks. She's given up RV trips. She stays home most weekends. She's scrapped her twice-a-month volunteer stint at a Malibu wildlife refuge -- the trek from her home in Palmdale just got too expensive.
  • How much higher would fuel prices have to go before she quit her job? Already, the 170-mile round-trip commute to her job with Los Angeles County Child Support Services in Commerce is costing her close to $1,000 a month -- a fifth of her salary.
  • "You'd have massive changes going on throughout the economy," said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. "Some activities are just plain going to be shut down."
  • $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.
Consumers
  • With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings,"
  • If any retailers would benefit, it would be those on the Internet. (Amazon.com (AMZN))?
  • Restaurant operators such as Brinker International, which owns the Chili's and Romano's Macaroni Grill chains, are suffering and are likely to struggle even more as consumers look for ways to reduce spending. Fast-food chains wouldn't be immune, experts say, although they might fare better as families downscale their dining choices. (we were on this thesis early last fall - see Sept 19: Tough Times for Restaurants?)
  • Vehicle sales, too, would probably continue to tank. (last year we called for 2008 to be the worst auto sales year since the early 80s - so far so good)
  • Nationwide, $200 oil and $7 gasoline would force Americans to take 10 million vehicles off the roads over the next four years, Jeff Rubin, chief economist at CIBC World Markets, wrote in a recent report.
  • As for the state's beleaguered housing market, prices are falling faster in areas requiring long commutes - than in neighborhoods closer to job centers. (we've been highlighting this - how the urban will be the new core, and the suburbs will be either the blighted area or for very well off)
Transportation
  • Workers stuck with long commutes and gas-guzzling cars would look increasingly to public transit, experts say. (problem is most Americans cannot get to public transportation)
  • But a huge influx of riders would strain aspects of the system, MTA says, noting that many buses are overcrowded at rush hour now. (well all you need to do is raise taxes and get more revenue - what's that? Oh never mind)
  • Travelers can also expect much fuller airplanes and much more expensive flights -- when they're available at all. (see April 8: Now on to Airline Inflation)
Trade
  • The fee increases on the ferry would be nothing compared with the added cost of transoceanic shipping if oil goes to $200. Some experts say high energy costs are altering global trade and slowing the pace of globalization. (this is a theme I am working on with some new ideas. If indeed crude does get to $200 within the next 18-36 months and stays there - we have some new investing themes to go after; and lose some others)
  • "To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."
  • Local distribution patterns could change too. Stephen Gaddis, chief executive of Pacific Cheese Co., a Hayward, Calif., cheese processing and packaging firm, thinks high fuel prices will push restaurants, retailers and food manufacturers to look for suppliers closer to their operations.
  • In the near future, however, consumers can expect to pay for the higher cost of producing food and moving it around the country, say food executives, farmers and economists.
The Workplace
  • Dramatically higher transportation costs would usher in an era of virtual mobility, or zero mobility, for many workers.
  • Videoconferencing, touted as "the next big thing" for years, would finally have its day, thanks to improved technology and a desperation to cut corporate travel budgets. But Gilligan of USC noted that lower-income workers tend to be in jobs that don't favor telecommuting, such as retail and food service.
Upsides
  • It wouldn't all be bad, of course. Some industries could boom, providing jobs and tax dollars. California has seen a jump in drilling activity as oil companies try to extract more crude from the state's fields. Regulators expect a record 4,000 wells to be drilled in the state this year.
  • Tourist attractions may also see an upswing in local business as families look for less-expensive vacation alternatives close to home.
  • And movies, a staple of the local economy, may prosper as Americans seek escapism and a (relatively) cheap night out.
Those are some weak upsides, but hey I need to show both sides of the story...

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