Investing.com - Markets continue to keep a close eye on the volatility of both WTI and Brent 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:M)," 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