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Forget about the price of gold. Whether it rises or falls does not matter unless you are a miner, a hoarder or an Indian farmer fretting about the cost of a wedding dowry. What matters to everyone, including farmers and miners, is the cost of fuel, and that is finally beginning to fall. Over the past six weeks, the value of a barrel of Brent crude has retreated by 15 per cent, dipping below $100 (U.S.) per barrel and in the absence of momentous turmoil in the Persian Gulf, there seems little reason for it not to fall further. China is slowing, oil stocks are high and consumption of oil in OECD countries is declining. This should be good news for the global economy, not quite a get-out-of-jail-free card but a better chance of boosting consumer confidence more quickly than would more government borrowing.
We forget that fuel prices are a permanent overhead in ordinary households, and that when they rise, the extra burden tends to erode discretionary spending, in a similar way as high interest rates. More dollars in the tank, fewer to spend at the mall. Just as the low cost of borrowing fuelled the American and European housing boom, the sudden surge in the oil price in excess of $140 per barrel in 2008 was the blunderbuss that knocked out the global economy after the financial crash crippled the banks.
You can see the squeeze on households caused by high fuel prices in the rising proportion of U.S. household expenditure spent on gasoline. According to the Energy Information Administration (EIA), average household spending on gasoline was at record levels in 2012, reaching $2,912 per year. More significant than the absolute number is the percentage of average household incomes that fuel spending represents.
From 1980 to 1999 the cost of filling up the family car fell from 5 per cent of the average U.S. household budget to less than 2 per cent. From 2003 to 2008 it rocketed up to 4 per cent, falling suddenly after the crash during the oil price collapse in 2009, only to rise sharply again. Last year, gasoline was 4 per cent of a U.S. household's budget, the highest rate for three decades. It's worse in Europe where taxes and duties are piled on top of the cost of fuel such that two thirds of the extortionate price of road fuel in the U.K. is now paid into government coffers. According to the RAC, a motorist's lobby group, about 11 per cent of average U.K. household spending goes into keeping the family car going.
Thankfully, that squeeze is beginning to lessen as the impact of shale oil begins to feed into the global oil price equation. It has already brought average gasoline prices below $4 per gallon, according to EIA figures. If Mr. Obama wants to do something really beneficial to help the beleaguered Europeans out of their mess, he should stop giving economic policy lectures and, instead, approve a few pipelines that might bring more oil onto international markets and kick the legs from under the Brent price.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.