The war in the Middle East has sent crude oil prices soaring in recent days. Over the weekend of March 7-8, the price of Brent crude, the international benchmark, spiked to $120 a barrel. That was up from about $71 before the conflict started, though it has since settled back to around $86.
As a result, gasoline prices are also rapidly climbing higher. The current national average price for a gallon of regular gasoline is now around $3.54, up $0.62 from a month ago, according to AAA. That's a 21% increase in a matter of a few weeks.
What could all this mean for investors? Let's have a look.
Elevated gas prices act as a tax on consumers
Higher gas prices act as a kind of tax on consumers, especially those on tighter budgets. Consider the Ford F-150 series pickup truck, the best-selling vehicle in the U.S. Its standard fuel capacity is 36 gallons. Increasing the price of gas by $0.62 drives the price of filling that gas tank up by more than $22.
That may not seem like a lot to some people, but to lower- and middle-income Americans, that's a real tax. And it decreases consumer spending on other goods and services, which takes a toll on the broader economy.
Image source: Getty Images.
For most Americans, gasoline and other motor fuels are about 4% of spending, lower than what it was decades ago, but certainly not insignificant. Higher gasoline prices also increase the cost of things like airline tickets and the price of shipping goods by truck.
In addition, there's the consumer sentiment angle, which some might dismiss but I believe is very real. Most Americans don't pay attention to economic data on jobs or inflation. They do, however, monitor gasoline prices. Because, after all, most roads across the country are plastered with giant neon signs displaying the price of a gallon of gas.
When they see those prices rise, many Americans tend to turn more negative about both their own finances and the broader economy, which can cause a decrease in consumer spending and borrowing. And, of course, higher fuel prices add to inflation, both directly through a bigger toll at the gas pump, and indirectly -- for example, on groceries that have to be shipped by trucks that run on gas or diesel.
NYSE: XOM
Key Data Points
NYSE: CVX
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Any way you look at it, higher gasoline prices are bad for the economy, though they are certainly good for shareholders of oil companies such as ExxonMobil (XOM +1.12%) and Chevron (CVX +1.27%), both of which are up more than 20% this year. And if you believe the war could go on a while longer with ongoing disruptions to oil supplies, those might be good stocks to hold.
