Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
With the release of CPI figures yesterday and PPI data today, we decided to spice things up with a unique bonus chart today. Kudos to Hedgeye for being long of energy for several months. In nominal terms, gasoline prices have been up and to the right. What's intriguing from the consumer perspective is the 50% surge in diesel futures over the last 4 months, especially when considering the dollar's strengthening during almost the same period. Conventionally, a rising dollar implies weakening commodities. However, this latest trend is more influenced by supply-side factors. While there's much to discuss about refining in the US and politics, we'll save that conversation for another day.
Today's bonus chart offers a different perspective: it equates gas prices to real wages. How many hours does an average worker need to clock in to afford a gallon (3.78 liters) of gas? It's about 8 minutes of hourly wages, roughly 50% higher than the average of the 1990s, but well below the 2008 spike. As a percent of median wages, gasoline is about 3% of spending (its weight in the CPI as well). However, the rapid price increase from 2020 to 2022 "stole" roughly 3% of US purchasing power and the recovery from that in late 2022 certainly contributed to a better-than-expected economic performance over the last year. With prices rising again, this is adding to consumer burdens.
The ripple effect of escalating oil prices lies in its pass-through costs. And we shouldn't overlook the looming diesel shortage, especially with winter harvest drawing near, impacting farmers and truckers.
Here's a fun fact: a 42-gallon barrel of oil yields 19.4 gallons of gasoline. The remainder, well over half, is used in producing more than 6,000 consumer goods. Some lesser-known products include umbrellas, fertilizers, surfboards, detergents, life jackets, ice chests, apparel, shag rugs, crayons, heart valves, nylon ropes, toothpaste, golf balls, and perhaps most crucially, toilet seats.
Learn more about the Market Situation Report written by Tier 1 Alpha.