By Peter D. Schiff
As oil whipsaws its way toward the unheard-of-level of $150 a barrel (crude closed at $134.60 yesterday, extending a multi-day skid, but traded above $147 as recently as Friday), Americans are finally responding to the pressure of higher gasoline prices and have downshifted their consumption.
Indeed, according to a report last week, U.S. consumers used 3.3% less gasoline than at the same time last year and usage now stands at a five-year low. Although the relative merits of slowing energy consumption is a subject upon which reasonable minds can disagree, the drop is nonetheless an extremely rare event in American economic history.
Many on Wall Street are cheering the possibility that further "demand destruction" due to soaring gasoline prices will ultimately lead to significantly lower oil prices. After all, this is basic economics. Prices are a function of supply and demand, and as demand drops, prices must follow.
This is simple logic – but it's wrongly applied.
The Global Gasoline Game
What is missing from this analysis is that oil is a global commodity, which means that its price is not simply a function of U.S. demand. As demand is destroyed here, it is being created abroad. The result of that swap will be an increase in oil and gasoline prices, despite the fact that Americans are using much less of both.
In countries where currencies have risen against the dollar, oil-price increases have been much milder. Given the strengthening economies overseas, and the slower price increases in those markets, foreign demand continues to rise, just as higher U.S. dollar prices cause demand to fall here. In addition, central banks in nations where currencies are pegged are continuing to print huge quantities of money. This massive monetary stimulus is fueling oil demand, as foreign consumers use the new cash to buy gasoline.
And that's not all. As economic-growth rates abroad far exceed what we're seeing here at home, foreigners are using their newly increased wealth to buy more automobiles. So, while car sales are falling through the floor in America, they are zooming around the world. Take a look at what is happening in Russia, where booming car sales have resulted in Russia surpassing Germany as Europe's largest automobile market. We are talking about the former Soviet Union, where not too long ago, many comrades still traveled in mule-drawn buggies. So, as poor Americans drive fewer miles due to higher gasoline prices, wealthier Russians more than make up the difference.
The Ripple Effect of Reduced Demand
Here lies the source of our problems. When the dollar was king, demand here in the U.S. market was strong. American consumers – armed with the mighty U.S. greenback – flexed their collective muscles and priced foreign consumers out of the market.
Now, however, that same greenback is little more than the proverbial "98-pound weakling," and foreign consumers are returning the favor by kicking sand in our faces. The bottom line is this: As more goods and resources are consumed abroad, Americans will be forced to consume less. Demand creation abroad leads to demand destruction at home. There's just no way around that fact.
But here's what most folks fail to realize: The demand destruction in America will not be limited to gasoline, but will encompass a wide variety of resources and consumer goods, as strong demand abroad prices more Americans out of more markets. In the end, America's gargantuan trade deficit will return to surplus, not because of a highly over-hyped export boom, but because of an import bust.
[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a regular contributor to Money Morning, and most recently wrote about . To find out how to get a report on the once-in-a-lifetime profit plays that will emanate from the so-called "SuperCrash" – and a free copy of Schiff's New York Times bestseller "Crash Proof: How to Profit from the Coming Economic Collapse," please click here. Schiff is scheduled to be a guest on Charles Osgood's TV Show, "Sunday Morning," on CBS, this Sunday, at 9 a.m. EDT].
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