Price movements by stocks and oil have continued their symbiotic relationship into the New Year. Stocks and oil prices moved in tandem a record 35% of the trading days in 2015. That ratio jumped to 68% in January. It’s difficult to imagine the US has become a global oil power and that our fortunes rest on higher oil prices (in the same manner as Russia, Venezuela, Saudi Arabia, Iran, etc.) but for now, oil prices are the tail wagging the dog and stock market is the dog!
Those of us who were driving in the mid-1970s vividly remember long gas lines and rationing based on license plate numbers because the country was running out of oil due to OPEC embargoes. Today, the idea that an ample global supply of oil is bad for the economy boggles the imagination. The laws of supply and demand are immutable; low prices will reduce supply until a price level is achieved that will spur additional demand. This month’s featured chart tracks the wholesale price of unleaded gasoline, which peaked at $3.32 per gallon in the summer of 2008 and was recently as high as $3.00 per gallon in 2013. The price today is just over $1.00 per gallon, which translates into $1.50 or so at the pump.
The consumer has already responded to lower gas prices by shifting their buying preferences to SUVs and pick-up trucks (together are classified as light trucks), as follows:
Type 2014 2015 % Change
Cars 7,749,432 7,572,662 -2.3%
Light trucks 8,773,231 9,897,997 +12.8%
Total US 16,552,663 17,470,659 +5.7%
Light trucks get worse mileage than cars and nearly every manufacturer is shifting more production away from cars over to trucks. In addition, the number of miles driven in the US is slowly increasing and has now topped the record set in 2007. Meanwhile, the supply of oil is being gradually reduced. Supply and demand will thus come into a better balance and perhaps the price of oil will stabilize and head back up to $40, $50 or whatever per barrel. If that’s what it takes to calm financial markets, that’s okay with us.