Saturday, January 22, 2011

That Giant Sucking Sound

Ross Perot coined this phrase back in the early 90’s as he objected to NAFTA during his campaign for the Presidency. Boone Pickens resurrected it a couple of years ago in describing the impact of foreign oil on the U.S. economy. And now I can think of no better to describe what might happen to our fragile economic recovery in 2011 and is certain to happen eventually.

Ok, I’m on the record as being eternally pessimistic and I tend to be uncomfortable when things are going well. But I take no pleasure in predicting that we will soon be back in recession mode. It’s not complicated. We cannot take 350-400 Million dollars per day out of consumer pockets and expect to keep the economy on track. It just doesn’t work. Some are forecasting that summer gasoline prices will be in the $3.75-4.00 per gallon range. At least a dollar per gallon more than it was in 2010. The United States consumes between 350 and 400 million gallons of gasoline per day. (That’s just gasoline…not diesel or any other petroleum related products).

The knockout punch in 2008 may have been the housing bubble or the credit crunch, but it was set up by months of body blows in the form of rapidly rising gasoline prices. When you take $100 or $200 out of a family’s monthly budget just to buy gasoline, it will soon take its toll on the economy. IF the $3.75-$4.00 per gallon predictions are correct, we will be taking almost $150 BILLION PER YEAR out of mainstream economic circulation. Yes, some of it does stay in this country and some individuals prosper from higher oil prices and spend those dollars on other goods and services. But for the most part, it’s bad for our economy. Depending upon what you believe about how a dollar circulates through the economy when used to buy something other than gasoline, the real economic effect is multiplied two or three times.

However, some are saying that we will dodge the big bullet, at least for awhile. If gasoline prices settle in at around $3.25 per gallon this year as most industry analysts predict, the economy may wobble a bit, but should be able to maintain the forward momentum. The real question is not IF gasoline will get back to $4 per gallon, but WHEN. And when it does, That Giant Sucking Sound will be too loud to ignore.

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