Many are wondering what is driving the price of oil. Prices have jumped about 30% since August. There are a bunch of factors at work here. At it's core is rising demand from around the world. We're seeing big upticks in demand from rapidly growing countries like China and India. And we have the weak dollar. Oil is priced in dollars, so as our dollar falls in value, foreign investors can basically buy oil at a discount. We also have geopolitical situations. Last week the U.S announced new sanctions against Iran, a major oil provider. Events such as this will continue to drive oil prices higher. $100 a barrel does not seem far away.
The concern this has for the U.S. Economy is that higher oil prices will translate into higher gasoline prices and higher home heating bills. These in turn could slow down the consumer. The consumer is what drives this economy and they're already facing some tough headwinds, thanks to falling housing prices and the subprime situation.
Now there is a belief that consumers are more immune to rising energy costs than they were in the past. That's because of rising wages. Because we earn more, less of our disposable income goes to energy costs. The broader economy itself is less reliant on energy. That said, if we really start to see prices rise, say $4 a gallon of gasoline, AuWerter thinks it will take a toll on consumers and the 4th quarter is a key one as far as consumer spending is concerned.
Part of what's been driving the price of oil is speculative investors. But investing in commodities outright is not something AuWerter recommends for the average investor. If you want to put a very small slice into a commodities fund or ETF, that's an option. The concern right now is that you're buying at a peak. Same for buying the stock of energy companies. You might be paying more at the pump, but if you're holding the stock of the big energy companies, at least you're benefiting on that end. But if oil prices fall, these stocks will fall too, so be fully aware of the risks.
The Fed meets this week and if a rate cut happens it's likely to drive prices higher, because the dollar will likely fall further. When the Fed cuts rates, it makes our dollars less attractive as investments, which is one factor of many that lowers the dollar. And again, because oil is priced in US dollars, a weak dollar means that foreign investors get oil on the cheap.
So far we haven't seen much of an uptick in gasoline prices. That's in part because right now is a relatively slow time for driving, we're off the summer rush and it's too soon for the holidays. But prices are likely to go up and we're likely to see higher prices for home heating oil as well as for airline tickets, and even food that's delivered from far away places. That said, as a consumer, there are things you can do to offset the prices. Install a programmable thermostat in your home. Keep your tires inflated properly, don't use super unleaded gasoline unless your car really requires it. Now is as good a time as any to really take a look at your household budget and batten down for the months ahead in case it gets ugly.
by Stephanie AuWerter and Jenn Eaker