Don’t Take Your Eyes Off Energy Costs

Oil prices have been soaring in recent weeks and traded as high as $126.20 a barrel for the basis June light sweet crude on the NYMEX on Monday. The amazing run-up in oil prices has been more than I expected, but there are pundits out there saying that $150.00 per barrel is not farfetched and could be in the works by 2010. If this pans out, the economy not only in the United States but globally, especially in China, could be in for a shock.

The fact is that global oil consumption is on the rise and I expect his to continue, as China and India, with over two billion people between them, continue to grow. The demand for energy will be massive and, unless production rises to meet it, prices will have no choice but to rise. Gasoline prices in the U.S. are already approaching $4.00 per gallon; in Canada, they are close to $6.00 Canadian per gallon. Rising gasoline prices are already driving down the demand for SUVs and gas-hungry vehicles, which is a reason why the big three U.S. automakers are struggling, while Japanese automakers with their fuel-efficient cars are faring better.

I cannot stress the importance of monitoring energy costs and their impact on consumer spending and the economy. In China, oil imports continue to be a major part of doing business, In April, the country imported 104 million barrels of oil, although this was lower than the 126.3 million barrels in March, according to preliminary data from China’s General Administration of Customs.

With oil and gasoline at such high prices, I feel that energy conservation will become more important, and this could lower the demand side, In addition, continued slowness in the U.S. Economy, along with that of China, could lower demand for oil. The problem, of course, is that slower economic growth would impact stock markets and this is something that is also not wanted.

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At the end of the day, it is precarious out there and I continue to advise prudence.