Gasoline prices are reaching their highest level of the year due to aggressive oil supply cuts in Saudi Arabia and Russia, as well as deadly flooding in Libya. This surge in oil prices is a cause for concern on Wall Street, as it can lead to higher inflation and potential interest rate hikes by the Federal Reserve. Moreover, it can result in reduced consumer spending and a higher risk of recession. However, according to David Kelly, chief global strategist at JPMorgan Asset Management, there may not be a need to fear the pump just yet.
Kelly believes that oil prices will not continue to rise over the next year or two for several reasons. Firstly, when adjusted for inflation, current oil prices are not as high as they were in 2008. Additionally, the US has significantly reduced its Strategic Petroleum Reserve, reducing the inventory overhang that could have helped balance the market. Furthermore, US oil production is growing rapidly, surpassing that of Russia and Saudi Arabia. This year is expected to be a record year for US liquid fuel production, with next year being even stronger. Additionally, slower global economic growth and the transition to green energy will limit the demand for fossil fuels.
Expensive oil has historically had a negative impact on the economy by increasing inflation and tightening monetary policy while simultaneously reducing consumers’ ability to spend on other goods. In the past, high gasoline prices have led to recessions. However, Kelly believes that the current high oil prices will not have a significant impact on inflation or future interest rate hikes by the Federal Reserve. He predicts that inflation will be below the Fed’s 2% target by the fourth quarter of next year.
In terms of investments, Kelly suggests that people should look for opportunities in the energy transition. It is crucial to recognize that the control over oil prices by countries like Saudi Arabia and Russia, who are not particularly friendly to the United States, can have a negative impact. Therefore, investing in alternatives to fossil fuels becomes more important than ever. If the Federal Reserve does raise interest rates further, it may increase the risk of a recession, so it is wise to position investments more defensively.
In summary, while rising oil prices can be concerning for the economy, there are factors that suggest they may not continue to rise significantly. US oil production, slower global economic growth, and the transition to green energy are expected to limit the demand for fossil fuels. Additionally, inflation is predicted to remain below the Fed’s target. Investors should consider opportunities in the energy transition and be prepared for potential interest rate hikes and their impact on the economy.
Sources:
– CNN – “Why soaring oil prices shouldn’t be another thing to worry about”