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Gas Price Hikes: The Silent Threat to Wall Street and Main Street

Entrepreneurs and investors, brace yourselves! A potential uptick in gas prices might be lurking in the shadows, posing a significant risk to both the stock market and the broader economy. Carson Group’s global macro strategist, Sonu Varghese, is sounding the alarm.

It’s not just a hunch; data is supporting the claim. Gasoline prices have surged by a staggering 23% this year alone, pushing the average retail cost to $3.80 per gallon. Though it hasn’t yet touched the zenith of $5.00 reached in June 2022, even a modest upward trajectory could spell trouble by slowing consumer spending and potentially amplifying inflation rates.

Now, what’s propelling these gas prices? About half of it can be attributed to crude oil prices. But here’s where it gets intricate: “crack spreads,” the price gap between crude oil and its refined counterparts, also play a crucial role. Constituting around 25% of a gallon’s price, these spreads can shift dramatically based on the availability of refined products like gasoline and jet fuel.

Varghese identifies a concerning trend. Crack spreads have soared recently, echoing the patterns of 2022 when gas prices reached their peak. He pinpoints limited inventories, refinery shutdowns, and an investment dearth in refining capacities as primary drivers.

Evidence suggests that the U.S. gasoline market is especially susceptible to sudden supply shocks, given the petroleum inventories currently sit below the five-year averages of 2015-2019. Instances like the recent fire at a major Louisiana oil refinery and geopolitical tensions like Russia’s invasion of Ukraine serve as stark reminders.

The ripple effect of surging gas prices can be profound. Consumers, feeling the pinch at the pump, may clamp down on spending. Plus, rising fuel costs can inflate expenses across industries, from increasing the price tag on your favorite food deliveries to bumping up airfares. This domino effect of escalating inflation could force the Federal Reserve’s hand, leading to a more aggressive interest rate hike strategy.

Varghese succinctly encapsulates the dual threat: A more hawkish Fed could result in quicker interest rate hikes, while households feel the strain of diminished real income. Reflecting on the previous year, he noted, “The economy was agile enough to weather the storm then, but a repeat scenario is something I’d hope we can sidestep.”

Although Varghese remains optimistic about the stock market and economic future, he emphasizes that another surge in gasoline prices could spell challenges not just for Wall Street wizards but also for everyday consumers.