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New York CNN –
Falling leaves usually coincide with falling gasoline prices as the summer driving season comes to an end and demand at the pump slows. Instead, gasoline prices are becoming more expensive and are now just a few cents away from their peak so far this year.
That’s because aggressive oil supply cuts in Saudi Arabia and Russia and deadly floods in Libya have pushed up crude oil prices. Oil prices hit a 10-month high on Friday and are on track for their biggest quarterly rise since Russia’s first invasion of Ukraine in early 2022.
Rising oil prices are a bad omen for Wall Street – they mean higher inflation and open the possibility of further economy-damaging interest rate hikes by the Federal Reserve. More pain at the pump also means less consumer spending elsewhere and an increased chance of a recession.
There’s already plenty to worry about this fall: Auto workers are on strike, the federal government could face another shutdown, China’s economy is still woefully subdued, and geopolitical tensions are rising.
Are rising oil prices another item to add to the list?
David Kelly, chief global strategist at JPMorgan Asset Management and a self-proclaimed worrier, doesn’t think so.
Before the Bell spoke to Kelly about why Americans don’t have to be afraid of the pump, at least now.
This interview has been lightly edited for length and clarity.
How high do you think oil prices will rise?
David Kelly: If there’s another shock, a big storm in the Gulf of Mexico, it could get stronger. But when we look at it, we don’t think the trend will lead to higher oil prices in the next year or two.
There are a few reasons for this.
One thing we need to remember is that the price of everything has gone up and all the input costs for producing oil have gone up. Sure, we’re currently at $90 a barrel – but if you measure it from In today’s dollars, we actually peaked at about $184 a barrel in 2008. Adjusted for inflation, the price of oil is currently not that high.
Another thing is that the US has reduced its strategic petroleum reserves, we have reduced them sharply. There was an inventory overhang that we were able to use to balance the market and it is not as large as before.
In the future, US production will grow very quickly – we currently produce more crude oil than Russia or Saudi Arabia. This will be a record year for liquid fuel production in the U.S. and next year will be even stronger.
The global economy is growing slowly, and this will limit the growth in demand for fossil fuel energy. And to be honest, the green energy transition is also limiting demand growth.
So when I look at the supply side, I think the US and other non-OPEC members will help, and when I look at the demand side, I don’t see much economic growth or demand for fossil fuels. Therefore, I do not expect that economic developments will significantly increase prices, although there could of course be a shock.
Why are oil prices so related to the recession?
Expensive oil has a very unpleasant triple effect: It drives up inflation and sometimes forces tighter monetary policy, while at the same time restricting consumers’ ability to spend money elsewhere.
This was seen most clearly in the 1970s… when high gas prices left people with less money for other things, and at the same time the Federal Reserve raised interest rates too high to combat inflation. This is why oil caused a recession in 1974 and 1975 and caused double recessions in 1980 and 1982. The great financial crisis of 2008 wasn’t about oil, but consumers found themselves in a weakened position when they jumped into oil because of the amount of money they were spending on gasoline. These are all reasons Americans are worried about a surge at the pump.
What do increased oil prices mean for inflation and future interest rate hikes by the Federal Reserve?
I certainly hope the Federal Reserve doesn’t respond with another rate hike. We do not believe they will rise in September and the futures market believes there is a 50/50 chance of them rising again in November.
Economists and the rest of the world talk about inflation differently: Economists talk about inflation as the rate of change in prices, and consumers think there is inflation when prices are high. For inflation to disappear, the price of gasoline doesn’t have to fall, it just has to stop rising. I think we will continue to see high prices for many things, including gasoline, but I don’t think we will see a price increase.
We expect inflation to be below the Fed’s 2% target by the fourth quarter of next year. The Fed measures inflation year-on-year. The fact that we are currently seeing an increase in gasoline prices makes it more likely that price growth will be below 2% next year.
We rode this roller coaster, but the thing about a roller coaster is that you get off where you got on, no matter how bumpy the ride was.
What should investors do in the meantime?
People should continue to look for opportunities to invest in the energy transition. The bigger issue is not the short-term price of oil, but the fact that the people who control it – the Saudis and Russians – are not particularly friendly to the United States right now. Even though we are a net exporter of oil, we are still affected by their ability to influence the market in ways that do not help us. I think this recent rise in oil prices just reinforces the fact that we need to invest in something other than fossil fuels.
If the Federal Reserve raises interest rates again, I think the risk of a recession will increase. So you’ll want to make sure you’re positioned a bit more defensively as the risk is that higher gas prices tend to increase the risk of a recession.
When the United Auto Workers union called for a strike against General Motors, Ford and Stellantis last week, one of its demands focused on an idea circulating on the fringe of labor reform circles.
Union members are not only demanding a 36% wage increase and more job security, but also want a 32-hour, four-day week with no pay cuts, my colleague Eva Rothenberg reports.
Proposals to shorten the workweek have gained traction in recent years, with many of these calls fueled by the flexibility of remote work during the pandemic. The increasing use of artificial intelligence in the workplace has also led some workers to question the need for a 40-hour work week.
Senator Bernie Sanders has long been a vocal supporter of a shortened work week.
“We are seeing an explosion of artificial intelligence and robotics in this country. And that means the average worker will be much more productive,” the Vermont Independent told CNN’s Jake Tapper on Sunday. “The question we need to ask as a nation is: Who will benefit from this productivity? We should begin a serious discussion – and the UAW is doing so – about significantly shortening the workweek.”
According to Signet Jewelers, the largest jewelry company in the United States, the pandemic has hurt engagement ring sales as relationships stalled or never blossomed as people stayed home or avoided socializing outside of immediate family.
This trend then led to an “engagement gap,” as couples, on average, get engaged about 3.25 years into their relationship, according to Signet’s proprietary data.
But with the return of many pre-pandemic lifestyles, including dating, Signet (owner of Zales, Jared, Kay Jewelers, Blue Nile and Diamonds Direct) said the lull in proposals is expected to bottom out this year. This means that commitments are expected to increase again from the beginning of 2024, reports my colleague Parija Kavilanz.
About 2.8 million couples get engaged each year in the United States, Signet CEO Virginia Drosos said during a company presentation at the Goldman Sachs Global Retailing Conference on Wednesday. Last year the number fell to 2.5 million. She said the number would continue to fall, settling at 2.1 million to 2.2 million in 2023 before rising again and fully recovering over the next three years.
In 2024, Signet expects engagements to reach 2.4 to 2.5 million. This boom is crucial for the company as bridal jewelry accounts for 50% of total merchandise sales.