{"id":8190,"date":"2021-10-25T12:25:04","date_gmt":"2021-10-25T16:25:04","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=8190"},"modified":"2022-02-27T17:54:32","modified_gmt":"2022-02-27T17:54:32","slug":"will-higher-energy-prices-stall-economy","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/will-higher-energy-prices-stall-economy\/","title":{"rendered":"Will Higher Energy Prices Stall the Economy?"},"content":{"rendered":"

\u00a0<\/strong>Across the board, energy prices are on the rise. Crude oil prices have risen over 60% in 2021 alone, and are hovering around a seven-year high. Natural gas prices have nearly doubled in the last six months, and are currently at levels not seen since the blizzards in 2014 pummeled the Northeast. The national average for gas prices is over $3 a gallon \u2013 which I\u2019m sure many readers have noticed \u2013 and coal prices are also at record highs.1<\/sup><\/p>\n

The cause of rising prices is, as ever, a supply and demand issue. As the pandemic risk has faded and consumers have ramped-up spending, it has resulted in increased production and shipping globally \u2013 which requires energy. As demand has soared, oil-exporting countries (namely, OPEC+) have only increased production incrementally, keeping supply relatively tight.<\/p>\n

On the natural gas front, inventories in the U.S. are low following the rare winter freeze in Texas (which saw pipelines freeze and demand soar), and also due to Hurricane Ida forcing almost all of the Gulf of Mexico\u2019s gas output offline.2<\/sup> June and July\u2019s heatwaves also put a dent in gas inventories, particularly as a drought-stricken West could not produce sufficient hydropower to power air conditioners. Europe is also staring down a winter beset by higher natural gas prices, as lackluster wind-power generation and a hot summer dwindled inventory as Russia plays hardball with exports.<\/p>\n

All told, of the roughly half of Americans who warm their homes with natural gas, the Energy Information Administration (EIA) estimates that costs could be 30% higher than last year. Those costs could be even higher if winter is colder than usual, or perhaps a bit lower if winter is warmer than average. The bottom line, however, is that consumers should expect higher gas bills this winter.<\/p>\n

Many argue there is a straight line that connects higher energy prices with lower consumer spending for everything else, which could become especially true heading into the winter season. In a sense, higher energy prices can serve as a de facto tax on consumers, since consumers cannot quickly and easily change energy consumption like we can change spending on retail, travel, or restaurants, for instance. If we\u2019re spending more money on energy bills and gas at the pump, it could mean less spending on other goods and services, which could impact economic growth.<\/p>\n

Or so the argument goes. I think the reality is a bit more nuanced. For one, about 7% of consumer spending goes towards energy, according to the Labor Department. In my view, this implies that we would need to see sustained higher energy prices across the board to see a material impact on spending, since higher energy prices would need to outlast the some $2 trillion in excess savings Americans currently hold. I\u2019m not convinced the supply-demand imbalance in the energy markets will last that long.<\/p>\n

The stock market has also weathered higher energy prices than what we\u2019re seeing today. Starting with crude oil, readers may remember a decade ago when oil prices averaged around $100 a barrel from early 2011 to mid-2014 (green circle in the chart below):<\/p>\n

Crude Oil Prices (West Texas Intermediate) from 2009 – Present<\/strong><\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/h5>\n

While oil prices spent years near the $100 a barrel mark, stocks continued their climb within the economic expansion that followed the 2008 Global Financial Crisis. As you can see in the chart of the S&P 500 below, there were certainly plenty of patches of volatility \u2013 but the positive trend-line was largely unfazed by higher oil prices.<\/p>\n

The S&P 500 from 2012 \u2013 End of 2014, Which Corresponded with High Crude Oil Prices<\/strong><\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong><\/h5>\n

In fact, higher oil prices in the early and mid-2010s were a catalyst to economic growth, as they led to increasing investment in rigs and shale production, which increased demand for steel, equipment, construction workers, and transportation workers.<\/p>\n

A somewhat similar story can be traced in the natural gas markets. As seen in the chart below, natural gas spot prices were higher in the mid-2000s than they are today, but the stock market was again unfazed \u2013 every year from 2003 to 2007 was positive for the S&P 500.<\/p>\n

\"\"<\/p>\n

Source: Federal Reserve Bank of St. Louis5<\/sup><\/em><\/strong><\/h5>\n

Bottom Line for Investors <\/strong><\/p>\n

Higher energy costs can affect many different parts of the economy \u2013 higher producer input costs, shipping costs, heating bills in the winter, and prices at the pump. Taken together, higher energy costs are inflationary, and higher energy prices for consumers could mean less to spend on other goods and services. Some would argue higher energy prices act as a tax on consumers, and I do not disagree.<\/p>\n

The question is whether higher energy costs persist for several months or even years, and whether higher costs ultimately overwhelm the greater than $2 trillion in excess savings American households currently have. I think the answer is no. It is also important to note that on a relative basis, energy prices are not at record highs \u2013 the economy and market have done well with prices even higher than what we\u2019re seeing today. Higher energy bills this winter may be an inconvenient reality \u2013 but I don\u2019t think it also means economic and market calamity.<\/p>\n","protected":false},"excerpt":{"rendered":"

\u00a0Across the board, energy prices are on the rise. Crude oil prices have risen over 60% in 2021 alone, and […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-8190","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8190","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=8190"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8190\/revisions"}],"predecessor-version":[{"id":8597,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8190\/revisions\/8597"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=8190"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=8190"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=8190"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}