The stock market continues to climb a “wall of worry,” with oil and Iran being today’s biggest concerns. Crude oil rose 6% last week to $109 per barrel on West Texas Intermediate crude and $125 per barrel on Brent sweet crude. According to the Energy Information Administration, the average gallon of gas now costs over $3.59, up from $3.18 the week before Christmas and $1.83 just three years ago.
The current oil crisis is exacerbated by a United Nations report which claims that Iran has significantly increased its production of high-grade uranium. Last week, Iran cut its sales of crude oil to Britain and France after those nations stopped importing Iranian oil. Now, more significantly, Greece, Italy, and Spain — which are big importers of Iranian crude oil — are scheduled to stop importing oil from Iran as of July 1.
Even if Israel refrains from attacking Iran, these boycotts could push gasoline to $4, $5 or even $6 per gallon. What effect would that have on the U.S. and global economy, especially in an election year? Demand for crude oil typically rises during the summer months, when the political year is in full swing.
Ironically, while the Fed says that inflation is under control, it is obvious that inflation is brewing every time you visit a gas station or a grocery store. Furthermore, even though North America is awash in crude oil and refined products, much of this excess is being sent abroad, so our prices at the pump remain high.
Besides Iran, two other factors are pushing crude oil prices higher:
- Improving economic production around the world.
- A weak U.S. dollar, which helps emerging nations afford more oil even while the price rises in dollar terms.
While the dollar offers 0% interest, currencies in resource-rich Australia, Brazil, Canada, Chile and other nations naturally appreciate against the U.S. dollar. The problem is that, since crude oil is priced in U.S. dollars, a decaying U.S. dollar naturally propels U.S. oil prices higher.
