Lower gas prices, the theory goes, should translate into a bump in spending. This would be a big boon to the retail sector in the run-up to the Christmas buying season.

Andrew Gordon is skeptical of this analysis. He says the real savings per household will be too small to make any real difference to consumer spending, even though he expects gas prices to continue their fall.

A quick look at the numbers might suggest otherwise. After all, every penny increase for a gallon of gas equals more than $1 billion in consumer spending over a year, according to Citigroup (NYSE:C).

But let’s break down the numbers a little more.

On June 1st, American households were spending an average of $83 a week for gas. Gas peaked around mid-July along with crude’s peak. American households were spending $86.50 per week for gas. Since then the price of gas has dropped roughly 12 percent to $76. So families are now saving $10 per week from the peak in mid-July.

But gas is still falling. And it’ll continue to fall as crude bursts under the $100 per barrel barrier. Gas is right now averaging $3.65 a gallon. I believe it’ll easily go below $3.50 by the end of the year. That’s another four percent drop. But let’s be conservative and raise gas savings by two percent. So families will be saving $12 per week from now until the end of the year.

There are 12 more weeks to go before the holiday season begins. The savings for families before they hit the stores on “Black Friday”? It’s a grand total of $144.

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And, mind you, this is not a check you get in the mail. The savings will accrue gradually. People will hardly notice the savings. Of course, they might notice that they’re still paying high prices for food and other goods – despite a drop in commodity prices. Take a look at the CRB commodity index…

Commodity prices are down an average of 25 percent from their peak in June. They’re hitting a support level right now and are oversold (according to the Slow Stochastics).

But with the rest of the planet following the U.S. economy down the toilet, prices could easily continue to fall. The real test will come when (and if) prices fall to the 200-week moving average support at about 340.

They haven’t fallen below that level since mid-2002 when the economy was just coming out of a recession. Of course, back in 2002, you didn’t have trillions of dollars of hedge fund and other institutional money fleeing the commodity markets, either, like you do today. So the drop in commodity prices is happening much earlier in the economic cycle.

These falling prices, however, will take a while to reach the stores. You see, manufacturers have been swallowing the bulk of input price hikes over the past few months when these prices were surging. Now that they’ve fallen back, these companies have a chance to build their profit margins back up.

PS: Yesterday, Wave Strength Options Weekly editor Adam Lass recommended investors to short the retail sector. Read on here to learn more about how to profit from the retail sector’s woes.

Source: The Hype Behind Cheap Gas

– Fannie and Freddie shareholders, of course, are royally screwed. This from Addison Wiggan and Ian Mathias at The 5 Min. Forecast: “Sorry, but if you were crazy enough own these “businesses,” you deserve it. We give a particular pat on the back to “smartest guys in the room” like Bill Miller, Rich Pzena, David Dreman and Marty Whitman. These famous fund geniuses bought tens of millions of Fannie and Freddie shares this year on behalf of their loyal.”

– Fannie and Freddie bondholders can breathe easy, however. The Treasury isn’t stupid enough to piss off foreign investors like China and Russia. Eric Roseman has been recommending following PIMCO boss Bill Gross and buying Fannie and Freddie debt.

– Andrew Gordon in Early to Rise says Andrew Gorden says not everyone comitted the gross mistakes made by Fannie and Freddie top brass. Andrew says Wells Fargo (NYSE:WFC) chief John Stumpf refused to follow Wells’ rivals in selling subprime loans and their derivatives. As he puts it, “It is more difficult to attend a party and leave before the trouble starts than not to attend the party at all.”

– Crude oil prices are down on news that hurricane Ike is unlikely to strick the Gulf of Mexico. According to AP, “Light, sweet crude for October delivery dropped $1.92 to $104.42 in electronic trading on the New York Mercantile Exchange by afternoon in Dubai.” This means oil is below the $106 support level. Last weeek, Global Commodities Alert editor Kevin Kerr wrote: “We may see more evidence of the impact of [Hurricane] Gustav in next week’s data, but overall we see strong support at $106 in the oil and it’s likely we will see prices rally once we get to that level.”

– The dollar is also down. This from MarketWatch: “The dollar traded mostly lower Tuesday as investors took profits following a sharp rally in response to the U.S. government’s massive bailout of Fannie Mae and Freddie Mac, strategists said.”

– All the fun and games on Wall Street isn’t doing much for gold prices. The yellow metal is flirting with a nine-month low at around $800.

– Gold bug Bill Bonner says this makes gold a bargain and a much safer bet than US bonds.

– Al Robinson at The Daily Reckoning Australia agrees. He says the gold sell-off is irrational and won’t last much longer.

– Barack Obama’s stock is feeling left out. The smart money has been rushing into his rival John McCain since the Republican nominee unvieled 1950s hockey mom Sarah Palin as his running mate. Irish futures trading outfit Intrade shows investors now favor an Obama win by a slim marin of 52.4 to 47.9.

– This is bad news for US gas prices, says Andy Carpenter at Investor’s Daily Edge.

But, doesn’t US foreign policy – that will continue under McCain… and in a year or two under Palin – make a strong case that the US is trying to isolate itself from the rest of the oil-producing world?

The US will get little or no oil or gas from Russia. None from Iran. There’s a chance it could get some from Iraq, but turn your back on that mess for a second and fugetaboutit!

On top of that, Saudi Arabia needs to manage its reserves to make them last. And, finally, McCain/Palin won’t kiss OPEC darling Hugo Chavez’s butt, so don’t count on much more than a dribble from Venezuela.

 Andy says only Obama can save America from a future of petro isolation.

In a Los Angeles Times column that sorely needed the intervention of a capable editor (memo to owner Sam Zell: Your budget cuts have hit bone. But don’t say I didn’t warn you about what you were taking on), author Indur Golkany and Cato Institute senior fellow Jerry Taylor flail about trying to explain. After three or four warm-up paragraphs, the crux of the argument is buried at the end of this passage:

But it’s difficult to square that worry with what we call the “affordability index” — the ratio of the average person’s disposable income to the price of gasoline.

After studying the average yearly price of gasoline from 1949 to 2007, and assigning the number “1″ to the ratio in 1960, we found today’s prices comparable to what they were in 1960 (1.35 today to 1.00 in 1960, with a high of 3.32 in 1998). The higher the gasoline affordability index figure, the lower the price of gasoline relative to disposable income.

Disposable income is the income you have after you take out taxes but before you take out food, clothing, shelter, entertainment or any other expense, discretionary or otherwise.

You want hard numbers? Here’s what the authors furnish:

…[P]erception is not reality where gas prices are concerned. By June of this year, disposable income had risen by an average of $1,627 per person over last year’s figures, according to the Department of Commerce, while the average person’s real expenditures on gasoline increased by about $490. Our incomes are still outpacing gasoline price increases. The problem is that our incomes aren’t outpacing the increase in gas prices lumped together with increases in everything else — air conditioning, food, etc. Our homes, meanwhile, are losing value.

That’s true as far as it goes. But comparing the present day to 1960 in this regard seems like apples and oranges. “Disposable income” then is a completely different animal from “disposable income” now: Thanks to the schemes of the Fed and the finance sector it enables, Americans’ disposable income is being eaten up by debt service to a degree unheard of — indeed unimaginable — in 1960. Americans have far less equity in their homes now. They have student loan debt. They have credit card debt. Those weren’t line items on most household budgets in 1960.

So no wonder it seems as if gasoline is taking a bigger bite. And don’t expect it to get any better.

Source: Is Gas Really Cheaper Than in 1960?

Check out the map below, it shows estimated monthly fuel costs as a percentage of household income.

 

Source: Oil price Information Service/Wright Express, USA TODAY

For the most part a map is a map is a map. But the reason that this one came to the forefront of the pile on my desk was simple – I had just traveled to a dark blue area.

Knott County Kentucky is a beautiful place. It’s located in the Appalachian Mountains just far enough off the beaten path to enjoy some of life’s simpler times (mountain vistas, friendly people, etc).

But on my recent trip there I noticed something odd – many of the local gas stations simply weren’t selling gas. Along with you, I’ve been watching oil and gas prices rise so I was curious when I heard that gas stations simply turned off their pumps.

So why did the stations shut down?

The answer was simple, there wasn’t enough demand once the price of gas got too high. As the map shows above, some Americans are spending more than 10% of their income on gas – which has apparently slowed demand. So instead of paying for the truckloads of pricey gas to sit in their underground storage tanks, gas station owners chose to shut off the pumps.

I mean frankly, it’s a little shocking. What if your local station just decided to close down? What if you had no reliable access to gas? And what if you had to drive an extra 10-15 miles out of the way to fill up?

Many Americans are starting to have those frustrations.

And the problem is more widespread than just my trip. Rural America is getting hit hard with the rising price of gas. And in the dark blue areas above, people simply can’t afford to buy gas, so they don’t.

Read on here or more on US gas prices.

PS: To receive daily insights into energy, oil, commodities and other natural resources sign up here for a free subscription to Whiskey and Gunpowder!

Source: How Much Is the Price of Gas Affecting You?

Supply disruptions in Brazil to Nigeria are also feeding into sky-high oil prices. Crude oil prices jumped as high as $147.27. A barrel of the black goo now costs $10 more than it did on Wednesday.

Sky-high oil prices are triggering the biggest transfer of wealth in history, says Mandraaj Singh inb Profit Watch – from the US and Europe to Gulf oil economies.

Oil exporting countries alone owned foreign assets worth $4.6 trillion at the end of last year – more 1.6 times the size of the British economy.

And the phenomenon is just getting started says Manraaj. Smart investors can profit by focusing their investments on where this new pile of Gulf petrodollars is being invested..

Even if the price of oil falls back to $70 per barrel, the petrodollar economies are going accumulate foreign investments worth $10 trillion by 2013. That’s two and a half times bigger than the UK economy will be at that point. And if the price of oil stays at $100 per barrel, their oil exporters are going to snap-up $12.2 trillion in foreign assets – THREE times the size of the British economy.

Remember that this isn’t something that’s going to happen at some distant point in the future. It’s happening right now. And the figures that we’re talking about are just for the next five years.

When you look at it from that perspective, it doesn’t make much sense as an investor to focus on companies that are trying to tap into UK or European economic growth.

What we’re seeing right now is probably the biggest and fastest transfer of wealth and economic power in history, but our daily media is still focussing on UK retail sales blues and falling property prices. These are obviously serious concerns, but smart investors still have plenty of opportunities beyond these shores…

Just look at the Persian Gulf…

Zoom-in on the six Arab countries of the Gulf Co-operation Council alone and you find that they’re raking-in $1.5 billion dollars from oil exports every single day!

Over the next 14 years, the Gulf Arab countries alone are going to earn up to $6.2 trillion from oil exports, even if the price of oil falls back to $70 per barrel. That’s almost 50% below where the price of oil is today. What are the chances of that happening? Not very high, if you ask me.

But even if oil falls back to $100 per barrel, the Gulf states are going to rake in almost $9 trillion over the next 14 years.

The big question of course, is where all this money is going to end up and how do we get our slice of it?

Where’s the money going?

Traditionally, the oil exporters re-invested the bulk of their petrodollars in Western securities and assets. That’s changing fast though. A lot more of that money is now being invested at home and in the fast-growing Asian economies.

In 2002, nearly 85% of the Gulf’s wealth was invested abroad in financial instruments mostly linked to the U.S. Dollar. By 2007, though, that was down to 75% as they increasingly focussed on the Gulf itself, Asia and Africa. You can bet that that is only going to keep on rising because growth in those regions far outstrips what we’re seeing in the US and Europe.

So that’s where you’ve got to position your investments if you want to take advantage of this petrodollar bonanza. And that’s precisely what we’ve been doing on the Profit Hunter service.

You’ve only got to look at our play on the Gulf’s petrodollar boom to see that happening. This company is the Gulf’s premier alternative asset manager and made its name with take-overs of some of the best-known Western companies in the 1980’s. It still has a big Western focus. But it recently launched a $1 billion Gulf investment fund to take advantage of local opportunities.

Given the kind of returns that it’s given investors – an average 20% per annum for the last 25 years – this is about as sure-fire a long-term investment as I can think of. Just remember that that 20% figure was what it produced when oil prices were a lot cheaper than what they are now.

The New York Times reports that “Stimulus Checks Boost Spending.” According to a Commerce Department report, US consumer spending rose by 0.4% in May — a nine-month high — thanks the $48 billion Bush et al sent out in the post.

Job done? Economy saved?

Not quite.

The 0.3% gain in wages and salaries for the month was cruelly offset by the 0.4% monthly rise in the (official) inflation rate.

And if you excluding the one-time-only extra cash pumped into the economy from the tax rebate checks disposable income adjusted for inflation remained flat. So unless Bush plans to splash out on another $48 billion, it looks like little has changed.

The problem with all this stimulation, says Bill Bonner, is it’s stimulating the wrong economies. Stimulated Americans simply go out and buy gasoline and other imports, thus stimulating every sandy oil producer in the Arab world…

“One Rebate Not Enough,” is the headline of an article written by Robert Shiller, appearing in the New York Times.

Shiller says the feds’ attempt to bail out consumers with tax rebates is too puny to do much good. Besides, he says, much of it ends up stimulating others peoples’ economies.

You’ll remember our explanation of the world money system. The Fed is no longer America’s central bank. Now, it’s the world’s central bank. But it’s a funny old world. The Fed provides money — currently at less than half the rate of consumer price inflation — in order to stimulate the economy. And it does stimulate the economy…the Chinese economy! And the Russian economy! And the Iranian economy (the fourth largest oil exporter in the world)! And the economies of every sandy oil producer in the Arab world!

So do the feds’ ‘tax rebates.’ Americans spend the money on gasoline and other imports. Rebates were intended to be a “booster shot,” for the U.S. economy, said President George W. Bush. But it’s the foreigners, not Americans, who are getting the boost. The foreigners build sparkling cities. They throw up huge factories. They roll more automobiles off the assembly lines… build more railways… pave more highways.

Yes…and even store more food. Comes an article in today’s International Herald Tribune that tells us the foreigners are “hoarding” food…and that his is pushing up food prices even more.

Meanwhile, in the U.S. of A., hearts break…and the lonely wind blows through empty houses.

After plummeting 358 points on Thursday, the Dow dropped another 107 points to end the week at 11,346.51. After sliding 4.2% last week, the Dow is now down 20% from its Oct. 9 high of 14,165. And that means the benchmark U.S. index has officially entered into a bear market.

“With oil prices bursting through the $140 threshold and seemingly unstoppable, economists are busily debating whether it’s all going to end in fire (inflation) or ice (deep recession),” said Doug Porter, senior economist at BMO Capital Markets.

“Equity markets aren’t so concerned about the fineries of the debate, but are instead much more focused on the ‘it’s all going to end’ portion of the discussion,” he wrote in a note, seen by MarketWatch.com.

Whether inflation or growth should remain the No. 1 concern of the U.S. economy is a question that was thoroughly discussed last week by the policymaking Federal Open Market Committee (FOMC) at its meeting Tuesday and Wednesday.

The U.S. Federal Reserve voted to hold the Federal Funds rate steady at 2.0% last Wednesday despite mounting inflationary pressures.

Several recent economic reports showed the U.S. economy remains sluggish at best. Consumer sentiment is at a record low, unemployment climbed 0.5% in May to 5.5%, housing values seem to be in perennial decline.

“Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters,” the FOMC statement read.

“The Committee expects inflation to moderate later this year and next year,” the statement read. ”However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”

Source: Crude Hits Another Record High Above $140

The outlook for US auto companies certainly isn’t looking good. Yesterday, Fitch Ratings downgraded GM and Chrysler’s investment ratings to from a B to a B-.

Both companies now have a negative outlook, meaning they could be downgraded further. Ford Motor Co’s rating is being reviewed.

It’s Déjà Vu All Over Again

By Charles Delvalle

Ford (F), General Motors (GM), and Chrysler haven’t been paying much attention to their past. The truth is every single problem they have today could have been avoided if they had just learned from their past. Back in the 1970’s, during the last oil shock, the big three saw sales drop off a cliff.

At the time the big three’s mainstream cars were blazing fast, and had 400 cubic inch engines that produced in excess of 400 horsepower… and drove you about 13 miles on a gallon of gas. Click this link to see the top ten gas guzzlers of the 70’s.

Japanese manufacturers, on the other hand, had fleet averages of 19-21 MPG. As you can imagine, Americans flocked to Japanese built cars in search for fuel economy.

The big three eventually responded by pushing up fuel economy standards. But since the late 80’s, fuel economy in an American car actually moved down.

Did they learn anything at all from the 70s? It doesn’t look like it.

Had they just put what they learned to practice, American manufacturers would have had the technology to make cars more fuel-efficient. But instead, they decided to dedicate over half of their sales to gas guzzling trucks and SUV’s.

Now that gas prices are over $4 a gallon and sales of gas guzzlers have plummeted, American manufacturers will have to scale down in a big way. Expect this transition to take years… not months. And in the meantime you’ll continue to see multi-billion dollar losses.

As Yogi Berra would once said “It’s Déjà vu all over again.”

However, crude oil prices fell for a second day today following a report that revealed demand for fuel in the US fell to an 18-month low.

Could this be a long-term trend? Is Byron out of step? Daniel Yergin, chairman of Cambridge Energy Research Associates, told a congressional panel yesterday that US gas use could have peaked in 2007.
Crude oil for August delivery fell on the Nymex 87 cents to $133.68 a barrel.

Oil Defies a Correction

By Byron King

The returns are coming in from the distant precincts of the oil patch, and the winner is……… Oil!

The price for oil has barely budged based on the Saudi Summit. There has been no summer sell-off, and I’d be surprised to see a significant pull-back as the summer driving season kicks into gear. (Followed by hurricane season, and then the buildup for winter heating stocks, followed by winter.)

What’s going on? Well, what the Saudis give — in proposed, future increased production… the Nigerians take away — with ongoing oil patch carnage that forces the likes of Shell (NYSE: RDS.A,RDS.B) & Chevron (NYSE: CVX)to close vast pipeline systems. Apparently the present trumps the future, even in the futures markets. Everything is connected to everything else, isn’t it?

Here is my take on the exit polls from the Saudi Summit…

Consumers and their representative governments are desperate for an oil pullback. This $135 oil is draining budgets. The poor & working poor are already marginalized in this cruel world of ours. Now it’s the turn of the middle classes to get kicked into the cellar of the modern age. People are working time-and-a-half just to put food on the table and gas in the car. Retirees and others on more-or-less “fixed” incomes are impoverishing slowly.

Unless they are impoverishing fast. Bankruptcy filings among the older and elderly demographics in the US are soaring. The bottom line is that the conventional image of a “decent standard of living” is rapidly receding for many tens of millions of households. The 20th Century is truly over. (I think this has much to do with the meteoric rise of Sen. Obama as well… He offers nothing new — mostly just classic, populist Democratic Party bromides — but he offers it in such a sweet and beguiling, teflon-coated manner…)

And it will get worse before it gets better. To be perfectly blunt, it might not even get better. Over the next year, and into the forseeable future, in the developed world people will go broke buying motor-fuel, heating oil and natural gas. (Wait until next winter… WOW!) In the less-developed world, people will go broke buying bread. And then the poorest amongst us will starve. Any way you look at it, it’s bad for business.

Fast-rising energy prices are decapitalizing entire nations. Energy prices are destroying wealth faster than people can re-create it. Entire segments of the world economy have hit the iceberg and are filling with cold seawater. Some industries are becoming obsolete in a matter of months. Much of the airline industry is drowning in red ink before our eyes — almost every flight in the sky is losing money, no matter how much they charge to check your suitcase or how few peanuts they put in the small package.

And down on the ground, most motor transport is just plain uneconomic any more… “Dead Rigs Driving.” Farewell to the “Warehouse on Wheels.” Sic Semper Globalization.

Large swaths of the auto & truck building industry have become capital-wastelands. Eg, GM (NYSE: GM) is closing SUV factories and planning to ditch the Hummer brand. This cascades down to firms that make everything that goes into a set of gas-guzzling wheels. You name it: hot-coiled strip, axles & tires, wire bundles, paints & coatings, window glass and seatbelts, and so much more. Billions of dollars worth of past investment is just gone… ‘bye-’bye, poof! And the good-jobs-at-good-wages? History.

What about those totally cool “Green Jobs” that everyone talks about? Sure, if you are nimble. If you have certain technical skills. If you are willing to relocate. If the winds of fate are blowing your way. Maybe you too can become a rooftop-solar installer, or a windmill repairman. But you ought to keep in mind that many of those “green jobs” will be working in dirty old hard-steel industries like oil drilling and coal mining, but doing it in an environmentally sound manner.

Really, 87% of the US energy supply comes from burning carbon. Nothing big will change in the next four years, or eight years, or twelve or twenty or thirty-two years. Actually, God help us if it does change “big.” We’ll probably be in trouble — big time.

If you sell oil, of course you are a happy camper right about now. Although some are happier than others.

If you are among the Arab nations of the Middle East, you may just be raking it in faster than you can spend it. Or else how to explain the building boom in UAE and Saudi, where the national bird has become the construction crane? Really — why build a 2,300 foot tall skyscraper in Dubai, unless it is the way of Allah to advise that you have too darn much money?

And as no less an authority than Allah can tell you, too much money can be a curse as well as a blessing. (”Give daily alms to the poor” is one of His commandments.) How bad is it? In the UAE as of late, there are severe shortages of cement. The contents in the holds of the cement-carrying cargo ships are spoken for long before the anchor drops or the vessel ties up at Jebel Ali. Trucks wait at the piers to haul the precious cement cargo direct to the construction sites. No warehouses or storage bins for the gray gold. Just drive to the point of use, add water, and mix with gravel… if you can get gravel.

This just illustrates the inefficiencies that come with having too much cash, and not enough good projects on which to spend it. Hey, does anyone want to buy the Chrysler Building in New York? Well, every time you buy gas at $4.25 per gallon, you are helping someone else do exactly that.

And the high rates of spending are breeding grounds for capital cost inflation. Too much money is chasing not-enough steel and machinery and skilled labor. So whatever you build is costing 50% to 100% more than you planned. Ain’t no way to run a railroad. Or a petrochemical refinery. Or an aluminum smelter complex.

And what of the far-seeing eyes in Riyadh? — And believe me there are eyes in that mysterious and secretive desert-kingdom land that rival the optics of the Hubble Telescope. They are not blind to the potential for high energy prices — especially in the context of a rapid price runup — to shock and weaken the economies of their far-distant customer base. What good is current income from oil sales if the purchasing economies are cast into recession or depression, and the currencies of denomination are wrecked by economic collapse? And what good is it to jettison the “special relationship” with the US that dates to World War II, and under which the Saudi royal family has prospered and multiplied? Is there someone in the wings who can offer a better deal? The Saudis are many things, but they are no fools.

If you are among another rank of oil-exporters, you are very happy with high prices, and you only wish that the prices were higher. You want all the cash you can raise to fund your elaborate social welfare schemes (Venezuela), so as to keep the natives un-restless. Or perhaps your ambitions are more in the realm of particle physics, and you need oil revenues to fund your nuclear ambitions (Iran). Or maybe you have pretensions of returning to great power status (Russia), and you need funds to buy weapons that your industry can manufacture but your government has not been able to afford. Ah! For these nations, the feel of jingle in the national pocket is incomparable. It’s hard to understand unless, perhaps, you ever enjoyed the feeling of whizzing down the street at the wheel of a stolen bicycle when you were young.

In that case, heck, if the price of oil drops, you are in trouble. So you like the high prices, and wish that the prices would continue to climb. Indeed, if the price of oil falls you probably have enough money to go out and engage your own bunch of personal traders to bid the price back up for your own account. Really, why be a price taker if you can be a price maker? It’s like what Mark Twain once said about his early job as a newspaper reporter in San Francisco… “My job was to cover fires. If there were no fires, I was supposed to go out and set some.”

Is there room for optimism here? Yes, in the sense that high prices are concentrating many minds on energy. “Energy” is the most important issue of our time, bar none. That is, people are finally beginning to understand the centrality of energy to our collective existence. Take away the cheap energy, and it becomes clear that mankind has spent the past century building the wrong kind of world.

Another way of saying it is that we’ve collectively built “tomorrow’s ruins” today. And I don’t mean just the physical structures, the bad architecture and stranded infrastructure that is worthless when energy is expensive. Think as well about the social structures that are beyond worthless when energy gets expensive. Tell me when you start to get worried…

Much of what happens in our time only happens because energy is relatively cheap and abundant. So when energy gets expensive, a lot of what happens is going to stop happening. And what will we all make of that turn of events? Well now…

On that note, I leave the rest to your imagination.

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: Oil Defies a Correction…

Jennifer Yousfi explains how US gas prices could keep on rising…

If oil stays near $140 per barrel, gas prices could easily top $4.75 a gallon by the Fourth of July holiday, Mark Zandi, chief economist at Moody’s Economy.com (MCO), said in a recent research note.

And while the thought of gas at almost $5 per gallon is distressing enough, Money Morning’s Investment Director Keith Fitz-Gerald thinks gas prices could go even higher. In fact, U.S. motorists could easily be looking at $7 a gallon gasoline within just two years. And that could have a disastrous impact on the U.S. economy.

“The bottom line is that the effect on the economy is going to be a lot worse than anyone’s talking about right now,” said Fitz-Gerald, a longtime energy bull who recently boosted his oil-price projection to $225 a barrel. “The bottom line is this: Until someone develops a truly [interchangeable] alternative for oil and gasoline – something that works the same, costs the same and is just as effective – Americans are just going to have to face the fact that over time they’re going to pay more.”

By fixating on near-term prices, and near-term fallout, Fitz-Gerald says that investors and economists alike are missing the bigger point: Long-term – or at least until a true replacement for oil is found – the U.S. economy is going to be badly stung, and U.S. consumers who don’t take steps to protect themselves are looking at a markedly reduced standard of living.

Moody’s Economy.com’s Mark Zandi agrees.

“Unless oil prices soon recede and Washington changes its views and acts to shore up the housing market and broader economy, the outlook for 2009 will weaken further in coming months,” Zandi said.

Zandi added that the U.S. Federal Reserve “will sacrifice near-term growth for the sake of stable prices and the economy’s longer-term prospects” and that the high cost of oil will prevent any further interest rate cuts.

But don’t look for gas prices to move up in a straight line to $5, $6 and $7 a gallon, Fitz-Gerald says. Prices will continue to fluctuate. There will be rallies, and retrenchments, as is the case with the price of any commodity.

But prices will rise, as there is still no truly “fungible” – interchangeable – replacement for petroleum. That’s what’s needed, Fitz-Gerald says.

In the interim, investors should: be “long” on oil and other commodities; have alternative-energy-related investments; and look for profit plays in ancillary sectors, Fitz-Gerald says.