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Batten Down The Hatches: Preparing For Inflation’s Perfect Storm

With the announcement that Iran is halting its crude oil exports to Britain and France, oil prices shot to almost $105 a barrel in Asia today.  Prices at the pump are already past $3.50 a gallon with the summer season still three months away, with some areas in California experiencing $4 or more a gallon. The impact goes far beyond families cutting back and where they go for summer vacation, however.

Though oil prices were already rising, Iran’s decision to halt crude shipments has accelerated the cost spike. Once again, a single Middle Eastern country appears to be able to throw the world economy into chaos. Iran cut off crude oil shipments as an apparent pre-emptive measure with the European Union after its bloc imposed sanctions on Iran’s crucial fuel exports. That bloc by the EU included freezing Iran’s central bank assets and a planned oil embargo set to begin in July.

Iran’s oil minister, Rostam Qassemi, warned earlier this month that Tehran could cut off oil exports to what it considers “hostile” European nations. The 27-nations of the European Union account for about 18% of Iran’s oil exports.

The real reason for this latest standoff isn’t really about oil at all. Both the United States and the EU have imposed sanctions against Iran in an effort to disrupt its nuclear program. Though Iran denies the allegations, a number of Western nations are convinced that nuclear program is aimed at developing nuclear weapons.

But the oil prices picture is too complicated to point to one country or event as the cause for escalating prices. China has decided to boost the money supply in an effort to stimulate lending and economic growth. China’s central bank said last week it would lower the ratio of funds that banks must hold in reserve. That move frees tens of billions of dollars.

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This shines the light on another culprit in roller coaster oil prices – speculation. The rise in oil prices began earlier this month amidst optimism the global economy will grow more than previously expected. JP Morgan raised its Brent crude price forecast to as high as $135 from $120.

“Building economic momentum has the potential to pull oil prices higher for the next 12 to 24 months,” JP Morgan said in a report.

At $3.53 a gallon, prices are already up 25 cents since the beginning of the year. And experts say they could reach a record $4.25 a gallon by late April.

“You’re going to see a lot more staycations this year,” says Michael Lynch, president of Strategic Energy and Economic Research. “When the price gets anywhere near $4, you really see people react.”

The Obama administration has been touting an improving economy and what it claims to be low inflation. But the figures it provides leave out the two biggest ticket items for the average American – gas and food prices. Higher gas prices inevitably hurts consumer spending as families see their budget hard bit by two items they can’t eliminate.

Americans spent 8.4 percent of their household income on gasoline last year when gas averaged an all-time high of $3.51 a gallon. That’s double the percentage a decade ago and they could pay even more this year. Making this even more troubling is the main factor that causes gas prices to rise, demand, is at its lowest in over a decade. Tom Kloza, chief oil analyst at OPIS points out that Americans are driving fewer miles now than in the last 11 years due to more fuel efficient cars.

The tensions with Iran show no sign of abating.  Europe and the United States are tightening economic sanctions against Iran. It in turn is threatening to block the Strait of Hormuz, a waterway along its coastline through which one-fifth of the world’s oil flows, and withhold its own oil deliveries.

An international banking clearinghouse essential to Iran’s oil sales said it is prepared to suspend services to Iranian financial institutions targeted by EU and U.S. sanctions. Such actions will put more pressure both on Iran and world oil prices.

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4 comments

  1. Once again the average American will have to lower their standard of living even further. Gas prices are going up, up, up. That results in everything else getting more expensive too due to increasing transportation costs, which in turn means people are buying less and more jobs are being lost. It’s all inter connected.

    More and more people are relying on the gov for handouts (unemployment/welfare/food stamps) and eventually these will be cut or stop all together. What do you think will happen then?? We are stocking up on food storage to prepare for what is surely to come. Check out ShelfRelianceSanAntonio.com The food is fantastic and the prices low (… for now). I’ve got car insurance, and home insurance…. food insurance is the logical next step. Even if things are getting better, which I doubt, we can always eat the food!

  2. We bought our first home in 1978 and interest rates on a FHA home were around 14% and conventional loans were running 17% or more. There was rationing of gas and in Florida there were even and odd days in which you could buy gas.Once President Reagan was elected things turn around and we experienced rapid growth and we started seeing good paychecks. We raised 3 boys and followed the rules and live a pretty good life. We had our ups and downs,but as the song goes,’That’s living”. Now when we are closing in on our retirement years and our health is failing, the politicians and now the bankers are making thing’s”RUFF”. We ain’t got much, just a small pension and you watch out,cause their next going to try to take that. We don’t mind paying our fair share but their spending tax payers money and they don’t care what they buy. I think that the “Taylor’s of this world( from the movie Mr. Smith goes to Washington) have taken complete control of the country and own some politicians.They keep talking about entitlements causing the problems, but look a bit harder and you’ll see that they have been robbing the Social Security trust fund and never paying for any of those IOU”s. Now they want to control the very doctor’s we see. If they wanted to be doctor’s they should have gone to med school. Please do us a favor, keep your paws out of our pockets and quit trying to play doctor. You have a hard enough time playing politicians who are suppose to support and defend the constitution, an your failing at that. Your co-payment for my professional services is $75.00.Please pay as your leavening the White House,Senate and House.Oh,by the way I have some WIN buttons from the Ford years,WHIP Inflation Now.As always thanks for letting me have my say. Southern Patriot

  3. The title of the article says “Preparing For Inflation’s Perfect Storm” yet give NO DETAILS on HOW to prepare. I am closing this window and never coming back to this site. What a waste.

  4. Price increases are not the same thing as inflation. Inflation as commonly used refers to the relative value of the dollar…when too many dollars are in the economy the dollar devalues which raises prices across the spectrum of goods and service available in the subject economy.

    The oil and food price increases are supply and demand related. In other words, the price increases are more related to lower supply relative to demand or higher demand relative to supply.

    The reason it is important to understand the difference is the remedies are completely different to fix the problem. In the case of monetary inflation one would remove dollars from the economy (various ways the Fed does that). However, if one removes dollars from an economy that is actually suffering from deflation we end up like with results like in the 1930’s. In the case of price increases the remedy is to increase supply or lower demand. The strategy of left wing legislators and this Administration has been to reduce supply of fossil fuel energy sources…hoping to make alternative energy sources more usable. The problem is this strategy will require higher yet energy prices that will also dampen economic growth. The solution to bringing alternative energy into the market successfully is to make alternative energy competitive with fossil fuel energy in costs. Presently, the industry is not there yet, hence the government subsidies to stimulate demand. Creating false markets is not going to create economic growth or viable alternative energy industry.

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