What Does the Price of Oil Have to Do with the Price of Tea?

“What’s that got to do with…?” is an expression that is often used to show an irrelevance or non sequitur in a subject of discussion you are having. It’s an idiom and in its most common form like this, it is a retort to an irrelevant suggestion. I find myself saying it often these days but in reality, I really shouldn’t say it.

The price of oil is rising and while there isn't much we can do about that, we do need to do something to prepare for the costs that will rise with it.

 

Economic discussions draw conclusions that every economic action somehow affects everything else that happens economically. The idiom in my example is trying to say that the “price of tea” is the farthest logical connection from the price of oil and is a sort of butterfly effect (the butterfly effect refers to the concept that small events are causes that can have large effects on us all). But is it? Well, surprise, surprise, surprise as Gomer Pyle said over and over again back in the day!

Yes, The Price of Oil Actually Matters A Lot!

Economics can fake left and go right just like a good running back does in an NFL football game. And that’s what’s happening right now economically speaking. It’s starting to frighten me and a whole lot of other people who try and keep an eye on the newly born “butterflies” that we see out there.

Although it has seemed unthinkable for years now, oil could soon hit $100 a barrel—or higher. And that is not good news for anyone with the exception of a few oil rich millionaires and heirs around the globe.

The reasons that have caused these worries and fears are multiple. First are the new looming Iranian sanctions scheduled to be implemented in November by the U.S. This is a result of the judgement that Iran is violating the nuclear agreement and we need to punish Iran for it. That’s a subject of controversy and concern in itself. Nonetheless, it’s going down.

Then we have the supply problems right here in the U.S. The loss of spare oil capacity from the Organization of Petroleum Exporting Countries (OPEC) have all of the knowledgeable market predictors betting that black gold prices (as Jed and Granny used to refer to it) are heading to $100 a barrel and that is a price unseen since 2014! Oil surpluses are the main reasons your gasoline prices have declined since they hit those record highs back then.

Global markets right now appear to be undersupplied and we simply don’t have a big glut of it as we have had in the past.

What Happened This Past Week and the Triple Threat Occurring Right Now

Oil prices slipped hard last week as stock markets fell. Even with that, traders are increasingly betting that the only way is up for the price of oil. According to data, in the last week the number of trades speculating on $100 a barrel rose to a record 31,000.

The political ramifications of what has been occurring in Washington and around the world such as the withdrawal from the 2015 Iran nuclear deal and the reimposed sanctions against them have negatively effected oil production. New sanctions become effective November 4th, next week.

Problems in Venezuela have reduced their production too. Now we have issues with Saudi Arabia that is a possible additional threat to world supply. Tons of barrels have been removed from the world market and there seems to be no real short term solution out there right now to fix it.

And Guess What? It Can Get Even Worse

The potential effects with Saudi Arabia over the disappearance and apparent murder of journalist Jamal Khashoggi could even spill over into the oil market. Pressures are now building to do something to punish the Saudis for their actions in the apparent murder of Khashoggi and the Saudis have threatened to and could actually cut their production if they are pressured enough by world and US actions.

Could We Have $400 Per Barrel Oil?

Saudi-owned Al Arabiya news agency general manager warned we could see an explosive move in oil prices very soon.

The Kingdom affirms its total rejection of any threats and attempts to undermine it, whether by threatening to impose economic sanctions, using political pressures, or repeating false accusation. The Kingdom also affirms that if it receives any action, it will respond with greater action. If U.S. sanctions are imposed on Saudi Arabia, we will be facing an economic disaster that would rock the entire world.

If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure.

These were the words and anxieties penned in an opinion piece by Turki Al Dakhil, who heads Arabiya news network and is close to the Royal Court, in which he openly talked about using oil as a weapon.

What Happened to Our Surplus?

As recently as 2016, OPEC overproduction and rising U.S. shale output created an oil glut, pushing the global benchmark Brent and US West Texas Intermediate (WTI) crude-oil prices to under $30. You probably benefited from the decrease in oil prices from the gas pump to heating your home and in dozens of other ways too if you think about it.

The price of oil actually affects everything you do and buy (shipping and manufacturing) and strangely enough, it does have something to do with the “price of tea” in China, India, and Britain and yes, right here in the good old USA too!

Oil is a huge part of the inflation cycle and as you can see, inflation has been very low over the last few years and is just now starting to increase prompting the rise in interest rates this year from our Federal Reserve board and the cost of living, too.

Increased global demand and normalized production levels have caused prices to rise to their current levels of about $84 for Brent and $74 for WTI, the highest in nearly four years.

The U.S. is also having its own logistical and economic problems. There are pipeline constraints in the United States especially in the top shale-oil fields in Texas.

Even More Possible Problems Loom on the Horizon

Supply shortages next year will be critical because of new global shipping rules that go into effect on January 1, 2020, forcing ships to reduce fuel emissions by using low-sulfur fuel or installing scrubbers to remove the sulfur. It requires the oil refiners to use lower-sulfur light sweet crude (to make the fuel) and there’s just not enough to go around. With oil prices at four-year highs, some global leaders have asked producers to kick in more oil. The head of the International Energy Agency urged OPEC and other major oil producers to open their spigots to prevent high prices from damaging the global economy.

The Trump Factor

President Trump blames OPEC for high oil prices, despite forcing Iranian oil off the market because of U.S. sanctions. As recently as September, Trump tweeted for OPEC to lower their prices. Uh, it hasn’t happened.

Despite Saudi Arabia having been one of the President’s “great” friendships of the past two years, the recent apparent murder of a Washington Post journalist now threatens that friendship. The price of oil and its geopolitical turmoil have been wreaking havoc way back into the early 1970’s and this is just the latest incarnation.

Final Thoughts

Unless you are member of OPEC or the leader of a major oil production company, there’s not much that you can do about the cost of oil and its effect on inflation. But, and it’s a big but, you can think about how all of this is going to impact your life, your spending, and the cost of living.

Saving more, spending less, and planning more effectively will help. Going exactly the opposite way will hurt. In the crazy world of 2018, we all have to think about this “what if” scenario whether we like it or not.

All of us can improve our finances when we actually try and when the warning shots of world inflation are fired, the time to prepare is right now, not tomorrow, or a year from Election Day. It’s now. Worst-case scenario will be this: You will be better off even if oil prices decline and inflation is at zero! But what if it is not and you are totally unprepared? Think about that.

You cannot determine the actions of anyone in the world except yourself. That can’t prevent economic worldwide crises but it can help soften the blow for you and your family if you take some actions before it becomes a crisis. What are you doing to protect your financial future from such a crisis?

About Gary Weiner @ Super Saving Tips

Over the last 45 years I've worked in retail (department stores and supermarkets) and financial planning. In addition, I am a shopper, born and bred, who enjoys the challenges of finding the best items for the best prices. When I'm not busy saving money or writing here at Super Saving Tips, I enjoy baseball, music, and classic movies. I am retired and live in New Jersey with my wife.
Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *