An announcement this morning that Turkish soldiers went into northern Iraq to go after Kurdish rebels sparked a rise of nearly $2.00 in crude oil trade this morning (December 18), a 1.9% gain.  Crude oil has fallen back slightly after approaching $100 per barrel during November.

While the battles over turf, values, and oil, wages on in the Middle East, worldwide economics continue to be impacted.  Average gasoline prices at US pumps hover around three dollars in all parts of the country in this week’s national fuel price reports.

While prices have dropped slightly in recent weeks, along with the slight pullback in crude oil, they still remain poised for an inevitable push toward the unseen $4 mark, without some sort of economic shift.  Gas prices have definitely affected the US market, but consumer spending has not really indicated a significant decline in transportation habits of drivers.  Consumer spending and consumer confidence reports the last several months have been relatively stable, considering the oil and gasoline prices, combined with the ongoing housing and mortgage issues.

Gasoline is perhaps the most elastic product used by Americans, meaning people are willing, or have a strong need to be flexible as prices climb.  Americans tend to be less reliant on mass transit systems than other countries of similar size and economic scope.  While consumer spending shows Americans are still using their cars, reports also indicate an increase in hybrid car buys, meaning the fuel conscious consumer is looking to invest in a more fuel efficient option.

The US government, already under pressure to assist Americans struggling with the housing and mortgage markets, has also been feeling the heat from consumers demanding better prices at the pump.  Today, the government approved new auto measures intended to create more fuel efficient standards and create alternative fuel options that might create a more competitive market, and potentially lower fuel prices.

The main focus of the new measure is its requirement that automakers boost average miles per gallon from 25 to 35 by 2020, on all passenger cars, trucks and SUVs.  This move is intended to motivate manufacturers to improve design on fuel efficiency as well as to research more efficient fuel alternatives.  In addition, the government set standards to increase the use of ethanol in gasoline.

According to estimates, these moves will save Americans around $700-1,000 per year, on average, in fuel costs when the measures take effect.  They will also reduce significantly US demand for foreign oil, which should reduce oil costs when supply and demand economics kick in.

While many Americans associate lower oil with lower gasoline prices, utility bills are also impacted when oil and natural gas prices fluctuate.  The last couple years, winters have become more expensive in cold weather America, but many expect that home energy prices related to natural gas usage should hold relatively steady, year over year.  The new bill also proposed standards for increased energy efficiency for many large appliances.

Many Americans are hoping that the US will find ways to rely more on domestic oil and invest in exploration for home-based fuel sources.  However, the current administration and Congress seems more content with encouraging research for alternative fuel options, such as solar, increased ethanol, or biodiesel.  In the meantime, today’s government action is more of an attempt to reduce reliance on Mideast oil.

Market Recap

US stocks dropped sharply on Monday with the Dow closing off nearly 180 points on the day, with a finish at 13,167.  The markets seemed to have a renewed nervousness over the housing and financial markets.  Tuesday opened on a more positive note, with about one third of Monday’s losses retraced shortly after the open and a close up 65.27 points in the Dow (.5%).  In addition to bargain hunting, an announcement that the European Central Bank was going to put half a trillion dollars into the banking system sparked investors.  Positive earnings from Goldman Sachs and Best Buy also gave the market an upbeat tone.  The Fed also endorsed a new multi-faced mortgage plan designed to protect credit-risk borrowers from manipulative or deceitful loan practices.  Housing starts and building permits dropped slightly, but basically met expectations, suggesting they had a limited effect on the day’s trade.

Neil Kokemuller
Tuesday, December 18, 2007
7:53 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.  Actions taken on the basis of the information shared is at the sole risk and discretion of the individual.