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Investing.com – Markets continue to keep a close eye on the volatility of both and oil prices, following recent rallies.
Ben Laidler, global markets strategist at eToro, believes that rising oil prices to yearly highs “pose a near-term double threat to markets, as a $100bn US consumption tax is already pushing up inflation expectations”. “This is a recipe for short-term market volatility,” he adds.
As Laidler explains, Brent oil prices hit $90 per barrel for the first time this year, as major OPEC+ producers Russia and Saudi Arabia extended their supply cuts until the end of the year. “This comes against a backdrop of resilient oil demand, with the biggest buyer, China, implementing a policy of drip-feed stimulus and the US rebuilding its strategic reserves,” he says.
“Rising oil prices pose a short-term double threat to markets, as a $100 billion US consumption tax is already pushing up inflation expectations. This is a recipe for short-term market volatility, but we believe it is ultimately self-correcting, as further oil price rises trigger fears of inflation, interest rates and slowing growth. US gasoline prices are 23% below their lows, with the impact exacerbated by low US gas taxes, the relative inefficiency of cars and huge mileage,” Laidler says.
IMPACT
“Rising gasoline prices act as a tax on consumption, the bulwark of the US economy. The hike from the December 2022 low equates to an annualised drag on the consumer of $100bn, equivalent to four times the revenue of Macy’s (NYSE:),” Laidler points out.
“It is also correlated with consumer inflation expectations, a key concern for the Fed as it considers its next interest rate move. The University of Michigan’s survey of one-year expectations has risen in the past three months along with gasoline prices, up 3.5%,” adds the eToro strategist.
DIFFERENCES
Gasoline prices are a major political issue, with high consumption in the US and high taxes in Europe, notes Laidler. “US cars have lower fuel efficiency than the world average (-20%), but drive twice as much distance (14,000 km) per year. Efficiency in the UK and EU is better (+15% above average) and they travel less (less than 7,000 km), but fuel taxes are high (see graph). 50% of the pump price in the UK and 60% in the EU are taxes (fuel tax and VAT). This is three times the figure in the US, where the federal gas tax of 18.4c/g has not changed since 1993,” explains the expert.
“The IMF estimates that the world spends $7 trillion on fossil fuel subsidies, which underestimates the environmental costs and uncollected consumption taxes. Of these ‘subsidies’, $500 billion come from the United States,” concludes Laidler.
Translated from Spanish using DeepL
