How Higher Oil Prices Impact Everyday Life And What You Can Do About It

You may be surprised to know some of the main uses of oil other than for gasoline for your car. There are over 6,000 products that are made from oil. Many more than you might expect. Let’s review the top 8:

1. Fuel. This includes gasoline, petrol, diesel, motor oil, kerosene, and different kinds of friction reducing products. Its importance is primarily that it runs all major machinery.
2. Lubricants. A lubricant is a material used to reduce friction between moving surfaces. They help in the running of machinery. Since they have a high boiling point and low freezing point, they can stay in liquid form for long periods of time. It scales down the friction of a machine which results in more efficiency and less overheating.
3. Paraffin Wax. Its main uses are as insulation and lubrication. Moreover, they are used by electric companies to insulate wires from humidity and other harmful chemicals. It is also used to cover food items such as fruits, and even as a sealant in cans and bottles. The waterproofing quality of paraffin wax is genuinely marvelous.
4. Petroleum Coke. It is a carbon-rich dense material that is one of the leading products which we can extract from crude oil. Pet coke (as it is commonly known) has over 85% carbon and consequently a much larger emission than coal. It is a rich source of carbon dioxide, and therefore we can use it in a lot of industries, especially as a fuel source for power generation.
5. Asphalt. The primary use of Asphalt is in road, bridges, and underpass construction. It is consumed as an adhesive to bind different materials to produce a durable concrete which can be laid down on pavements and roads.
6. Petrochemicals. Petrochemicals are a fundamental component of a lot of products. They can be used in a wide variety of ways, derivable from petrol (also known as petroleum distillates) or as chemical products that we can create in a lab. Without petrochemicals a lot of manufacturing could not occur and many plastics would not exist.
7. Sulphur. It is one of the main components of fertilizers. Also, in the manufacture of sulfuric acid. We use it in the pharmaceutical and agrochemical industries. Fungicides and pesticides are sulfur-based.
8. Propane. In gaseous form, propane can be used in a lot of ways. In countries where natural gas is not available freely, people use and depend on propane for cooking and for generators to heat and/or cool.

Oil is a miracle product used in about everything in society, whether it is for driving, manufacturing, an integral part of our power supply or all the numerous by-products.

With the retail price of gasoline, the average middle-class consumer is being punished. Every day I read where people are now feeling the pain of much higher gasoline costs, especially those that have long commutes to work as well as the trucking community.

However, it is not just the average US citizen feeling this. I have some well to do friends who enjoy the use of power boats and their own airplanes. Both have told me that they, and their friends, are cutting back in a big way. Let me give you an example:

One friend with a 40-foot power boat consumes 50 gallons of gasoline an hour. If he goes boating, he will frequently be on his boat for an average of 2.5 hours. That amounts to about 125 gallons. In 2020 this cost him approximately $410+ to be out on the water. Today, it will cost him no less than $750 for the same 2.5 hours. That is an 80% or more increase in fuel charges. He is taking less day trips on his boat.

Another friend has enjoyed using his private jet which he personally owns. Many people use fractional jet service. Either way the hourly rate for these fancy toys have gone up dramatically. My friend was flying his jet for about $2,100 an hour in early 2021. Today it is close to $5,000 an hour and climbing (that also includes higher pilot fees, but fuel charges make up a considerable part of the hourly equation). He is now flying commercial and not using his own airplane much.

The price of oil is affecting us all in many different ways. As it climbs, oil has a detrimental effect on the stock market. Higher costs are getting factored into everything including, but not limited to, the cost of transporting goods, higher production costs in manufacturing, higher power costs for shops, restaurants, movie theaters, entertainment venues and certainly office buildings. Higher costs for airplanes, cruise lines, hotels, and vacation homes. I could go on and on.

Furthermore, the impact of higher energy prices on agricultural products is profound as fertilizer uses energy intensive products and farmers need fossil fuels to propel their vehicles to actually farm. Increased crop costs also impact livestock production as well.

Learning from history, in the 1973, OPEC embargoed oil and the price went from $3 a barrel to almost 12 and that had a major impact on the price of soft commodities. In fact, much of the impact did not hit the soft commodities markets until a year or more after the initial embargo. It caused massive inflation and stagnation in the global economy for almost 7 years. Hence, it is hard to see how this inflationary surge remains transitory as the initial surge in oil costs takes time to trickle through to the general economy.

Higher oil prices will begin to affect the growth rate for US corporations and will inevitably slow down the economy. This, coupled with the Federal Reserve’s plan to rein in inflation by raising interest rates, will surely cause an economic slowdown. Most economists estimate the growth rate for 2021 at no more than 1-1.5%.

Here are a few of the things that you can do to better protect your portfolio from the rising costs of fuel as well as other goods and services in the US:

1. As we mentioned last week, diversify your portfolio. Steer away from highflyers and high-priced technology stocks and include value stocks with exposure to financials (benefited by higher interest rates), lower valued consumer stocks and energy related issues.
2. Hedge against inflation by investing in commodity related stocks and ETFs. We have been in agricultural and energy ETFs for almost a year now.
3. Get a financial “tune up.”

• 3 of the 4 key indices continued their move higher, with SPY breaking out above its 200-day moving average and QQQ above its own 50-day moving average (+)
• Volume patterns improved significantly, with 3 of the 4 indices showing more accumulation days than distribution days over the past week (+)
• The New High/New Low ratio improved for both SPY and the NASDAQ Composite after bouncing back from oversold levels and now sitting in neutral/positive range (+)
• Risk Gauges maintained a fully Risk-On reading across the board (+)
• 1-month v. 3-month volatility (VIX/(VXX) significantly improved, supporting the Risk-On scenario (+)
• The number of stocks above key moving averages improved for the SPY overall and is working off overbought readings from last week while still moving up (+)
• Growth Stocks (VUG) remain in Risk-On mode despite Value Stocks (VTV) closing near all-time highs (+)

• Both Gold (NYSE:GLD) and Oil (NYSE:USO) regained their 10-day moving averages as a result of continued geopolitical stress and inflationary pressures mounting (-)
• Agriculture (DBA) hit its highest levels since 2016, a major factor contributing to global inflationary pressures (-)
• US Long Bond (TLT) completed a classic head and shoulder top indicating much higher rate hikes in the near future and the potential end of a 40-year downtrend in rates (-)
• Commodities/Natural Resources had a great week along with Metals and Mining (XME) stocks

• Energy (XLE) +6.6% and Materials (XLB) +3.7% led the rally up and surprisingly, Utilities (XLU) +2.8% outperformed the SPY benchmark…A bit concerning to see Retail (XRT) -2.6% and Homebuilders (XHB) -8.8% likely as a result of newly raised rates (=)
• The McClellan Oscillator on SPY reached its highest levels since the winter of 2020, an overall positive move up that could also potentially be viewed as overbought (=)
• The NASDAQ Composite is running even richer than the SPY, hitting its highest levels on the McClellan Oscillator since May 2020 (=)
• An interesting anomaly, Utilities (XLU) closed at all-time highs despite its intermarket relationship with SPY being in a Risk-On mode (=)
• Cash Volatility ($VIX.X) is still holding at its 200-day moving average and providing an inconclusive reading for the time being (=)
• Yield Curve readings are still looking ominous, with the 2.5-10-year part of the curve now inverted (=) but other areas of the yield curve are still positive/normal
• We’re getting a very mixed reading from Mish’s Modern Family, with Biotech (IBB) and Retail (XRT) closing at or below their 50-day moving averages while Transportation (IYT) maintained its bullish market phase and Semiconductors (SMH) improved to close the week in an Accumulation phase (=)
• Emerging Markets (EEM) were barely up on the week, however Latin America (ILF), a subset of emerging markets, exploded to the upside this week—not surprising considering how commodity centric they are (=)

Written By: Keith Schneider