Gas Prices and the World Demand for Oil

Gas prices are up about a buck from last year, and that is impacting discretionary spending. Will this oil shock lead to another stock market collapse?

It seems President Obama has finally noticed that gas prices are higher. Back in 2008, he urged Americans to inflate their tires to get better gas mileage. Not the worst advice ever, but it did seem to lack a bit of compassion for those trying to make ends meet from month to month.

In the meantime, we have unrest in the Middle East. Oil production in the Gulf is down about 13% since the BP oil spill. Most of the US is off-limits to new oil drilling. All of this is happening as the world economies are improving and the demand for oil is increasing.

Rather than blaming the voters for keeping their tire pressure too low, President Obama has found a new scapegoat: Evil Oil Speculators. Yes, another synonym for rich, Wall Street types, who steal from the poor to line their pockets.

The problem with the new scapegoat is that oil is a world commodity that is traded every day. This is not something that the US controls the price of. Oil prices are determined by supply and demand; they depend on how much a buyer is willing to spend on the next barrel of crude.

The reality is that the world runs on oil. The price of oil is going up. This directly affects people's ability to spend. If people are spending money at the pump and sending their cash overseas, that's money that doesn't get spent at the malls, restaurants and coffee shops. It affects company earnings.

And on the other hand, Exxon reports this week. I bet their earnings have been affected, too.

Disclosure: Long XOM.