$5 gasoline is a message

The spike in oil prices isn't a surprise or a mystery. 

We needed prices to go up.

I pay attention to the stock market, the price of oil, and inflation. My financial security depends on it. Maybe yours, too.

I have owned oil stocks for many years. Like everybody in America, I use fossil fuels. I consider it hypocritical to pretend to be "too good" to own oil company stocks when I am so dependent on their products. I am betting that oil will remain useful for decades to come and that the companies that produce it will be profitable. It might not work out. Saudi Arabia could deliver oil to the U.S profitably for about $11/barrel, if they wanted. I am betting they won't choose to do it because they, like me, want an orderly oil market.

In 2020 COVID slowed the world's economy. Energy use plummeted. People drove less. Businesses closed. Energy stocks were, by far, the worst performing industry sector in the stock market, and had been for seven of the previous 10 years. Oil companies were investing in fracking and weren't able to sell oil for enough money to make it profitable. 

The Dow Jones Industrial Average dropped Exxon from the 30 stocks. The whole energy sector was considered a dinosaur industry. The investment story about Chevron, Exxon and the others was that they had squandered money by over-investing in oil production. The companies scrambled to assure investors they were cutting back on exploration and production. Briefly oil was in such oversupply, and the market so disordered, that oil futures had a negative price. Speculators had to deliver oil but had no place to put it.

In 2020 President Trump urged Saudi Arabia to cut back on oil production to help stabilize the world price of oil to keep oil producers solvent during the price slump. That was a good thing to do under the circumstances. Saudi Arabia agreed to do it. They owed Trump. The American government had turned a blind eye to their leaders having ordered the killing and dismemberment of a Washington Post reporter.

The oil oversupply era ended. Our economy recovered in 2021. Biden hasn't persuaded Americans to be happy about it, but employment is up and people are driving again. Businesses are scrambling to make things again. Energy use is up.

Oil prices moved back up. Oil companies that had been losing money can now sell their products profitably. Then, the war in Europe disrupted the oil supply, so prices moved up more. Now Biden is banning import to the U.S. of Russian oil, and that moves prices up even more. (That, too, was the right thing to do under the circumstances.) Companies that had been basket cases are now profitable. Chevron's stock price is double what it was two years ago. 

Messages. blog looks at non-verbal messages. The price of oil is a non-verbal message. The price-message two years ago was that nobody in America wanted as much oil as was produced. Divest from oil stocks! Now the price message is that we desperately need our fossil fuels and we will pay dearly to keep getting them.

Biden can hope this message gets through

Gasoline at $5.00 a gallon sends a message. Oil companies get the message that there is money to be made, so they will go back to investing in extraction. $5 gasoline tells consumers maybe their next car should be electric. That message trickles down. People in showrooms wanting an electric car are a direct message to auto companies. $5 gasoline tells some consumers to think twice about buying a Dodge Ram 3500. The political message of $5 a gallon gasoline will be Biden's incompetence unless he can create a very powerful contrary message of it being Putin's fault. It may be too late, and this isn't what Biden is good at. 

I have a message about markets. The reason the station is open for business, and that it has gasoline for sale at all, is because the price is $5. If it weren't $5, the station would be closed and there would be a sign saying "out of gas."  Chevron stock at double last year's price is also a message to oil company management. It says that investors don't want to abandon a company that made investments in oil production. They want to own such a company.

That is how markets work.