Gas prices are rising swiftly and many consumers are seeing prices of $3.50 or more at the pump. Many analysts are projecting that oil may rise above $4 a gallon over the next few weeks, and experts are divided on what is causing a run-up in prices. Some believe that it is speculation while others feel that the price rise can be attributed to the recent uprisings in the Middle East.
Whatever the reason, it is obvious that a continued rise in oil prices could put the brakes on the economic recovery and hurt three areas in particular:
1. A Fragile Consumer
The consumer was just starting to feel confident about the United States Economy again. Retail numbers have been positive over the last few quarters as consumers have had an appetite for the products of companies like Amazon (AMZN) and Apple (AAPL). Unfortunately, rising oil prices may put a dent in the spending habits and travel preferences of consumers. Companies will have to pass along increased transportation costs to consumers in the form of higher prices. As a result, items such as food, consumer staples, and retail products are seeing their prices increase. Higher oil prices are forcing companies to raise the prices on goods at a time when consumers are still very price conscious and that does not bode well for the economic recovery.
2. The Unemployment Rate
The U.S. unemployment rate has just started to drop over the past few months. It has descended from a high of 9.8% last fall to 8.9% this past month. Firms like Goldman Sachs (GS) believe that an unemployment rate below 8.5% is distinctly possible. Unfortunately, rising oil prices could put a new wrinkle in domestic hirings. Companies will be less likely to hire at a time when their input costs are rising. They will instead try to maximise production with their existing talent pool. It is unlikely that unemployment will be able to continue to drop if oil remains above $100 a barrel.
3. Consumer Travel
Pain at the pump is really bad for summer vacation travel. If oil prices stay high, a number of industries could see poorer numbers on their bottom lines, particularly the travel industry. Airlines, hotels, and travel destinations were hurt the last time that oil prices were over $100 a barrel and likely would be again. As a recent example, in 2008, many consumers opted to take vacations that were much closer to home in order to conserve fuel and save money. Higher gas prices have a big impact on discretionary income and force consumers to scale back on their travel. In fact, it is high oil prices that have led to the recent rise in popularity of staycations.
In order to get the recovery back on track, the United States government may be forced to use oil from its Strategic Petroleum Reserves to help squash fears over potential oil shortages resulting from the conflict in Libya and other Middle Eastern countries. The hope is that this strategy will help tame some of the rampant speculation taking place in the market. Moreover, any resolution to the global conflicts will certainly help ease the tension over oil prices. With that said, be prepared for the potential of higher oil prices and how that may affect your wallet over the long-term.
Mark Riddix writes about investing topics on Money Crashers, one of the top personal finance blogs. Mark is also the founder of his own finance company, New Horizons Financial Management and writes a weekly column for Benzinga every Wednesday.
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