How have economic conditions changed from the impact of rapidly changing global events? Military action in the Middle East is drawing global attention, overshadowing the ongoing war in Ukraine and escalating tensions surrounding China, Taiwan and even Cuba.
That’s oil. If you’re old enough to recall the opening theme song of the old TV sitcom “The Beverly Hillbillies,” you’ll remember the phrase “black gold” referring to oil. In the show, Jed Clampett fires his gun into the ground while hunting for food and bubbling crude oil emerges.
Over the past century, this commodity has become a critical variable in shaping a country’s political and economic influence. In many cases, it’s also a catalyst for war. In a broader context, oil price shocks are associated with nearly every recession since 1969. The two exceptions were the dot-com meltdown at the turn of the century and the real estate crisis in 2008-10.
More recently, oil prices dominated headlines due to disruptions in the Strait of Hormuz and the Red Sea, and the destruction of infrastructure across the Middle East. The key question becomes: What price levels become game-changers for consumer and investment decisions?
This matters greatly for farmers and ranchers, given that oil costs can drive up to 80% of farm and ranch expenses. It also influences about 60% of expenses and investment decisions across the broader global economy.
Duration matters
What are the price levels that drive behavioral change? Here they are in order:
- Gasoline prices average above $4 per gallon nationwide.
- Diesel fuel prices exceed $5 per gallon on average.
- West Texas Intermediate oil prices are above $100 per barrel.
The critical factor, however, is duration. These thresholds must persist for more than 15 weeks to significantly alter behavior. We are watching this closely.
The issue extends beyond supply chain challenges in shipping through the Strait of Hormuz. The more critical concern is the long-term destruction of oil field infrastructure and key water resource systems in the Middle East. Add to that the ripple effects on domestic and global economic growth, interest rates, and both fiscal and monetary policy, and the picture becomes even more complex.
These numbers deserve close monitoring through midyear to determine their impact on the economy and potentially on November’s midterm elections.
Get out the popcorn, but not too much butter! This could get very interesting.