Oil shows up in thousands of places besides your car's fuel tank and engine. It's true that most oil is used as a source of energy in the United States and that's not likely to change anytime soon. The average barrel of oil yields the following: gasoline (42%), diesel (20%), jet fuel (9%), heating oil (4.5%), heavy fuel oil (4.5%), liquefied petroleum gases (4.5%) and other products (16%).
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All you have to do to see the effect of changing oil prices is drive by a gas station. However, the effects are more far-reaching than what is immediately visible since petroleum permeates our entire economy. Here are some areas of the economy and products that are affected by oil prices.
Petroleum is used in many of the medical products we take for granted. Visit any hospital or doctor's office and you will find these items that are derived from petroleum: heart valves, artificial limbs, stethoscopes, syringes, hearing aids, vaporizers, anesthetics, antiseptics, operating gloves and equipment tubing.
In the home, petroleum is a major component of many items found in medicine cabinets and on cosmetic stands: dentures, aspirin, nasal decongestants, rubbing alcohol, deodorants, cough syrup, bandages, burn lotions, antihistamines, allergy medications, vitamins, cologne, insect repellants, moisturizers, soaps and petroleum jelly.
Plastic is everywhere, and this carbon-based polymer compound is an essential part of everyday life. Walk through any store or supermarket and you will find hundreds of items stored or packaged in plastic. Because of their inert nature, plastics can be used for these purposes without fear of chemical interaction with the contents. (Find out how to invest and protect your investments in this slippery sector, read Peak Oil: What To Do When The Wells Run Dry.)
In addition, plastic is used in a wide range of products that require shaping and molding. These include computer housings, toys, eyeglass lenses, shingles, computer disks, athletic shoes and thousands of other products.
3. Around the House
Look in your closet and you will find clothing made from petroleum-based fibers including rayon, nylon, polyester and artificial furs. Look down at your floors and you will likely find petroleum in the form of carpet, linoleum or other synthetic flooring.
The kitchen is stocked with lots of products that rely on petroleum: appliance casings, dishware, cooking utensils, ammonia, glue, tape, ink, candles, matches, shoe polish, dishwashing liquid and many other cleaning products.
4. In the Garage
It's more than the gas in your car that is impacted by crude oil prices. Under the hood are several other petroleum-based products that keep your car running smoothly and efficiently including hoses, wiring, antifreeze, transmission fluid, brake fluid, grease and motor oil. Beyond the lubricants, car interiors have many parts made from petroleum.
Other items in the garage that depend on oil include your lawnmower, bicycle, fertilizer, garden hose and that leftover paint in the corner. When you pull the car out of the garage and head down your driveway, you may be driving over asphalt that is a byproduct of petroleum.
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While rising oil prices have a direct impact when you buy gas for your vehicle, the indirect impact is felt throughout the economy. When an airline pays more for jet fuel, that cost may be passed on to consumers in the form of higher ticket prices or fuel surcharges. When the railroad and trucks that deliver food to the supermarket pay more for diesel fuel, the added cost shows up during checkout when you pay for your groceries.
The tankers that bring the oil to the U.S. from other foreign sources are paying more for their fuel too. When oil goes up, in a sense we end up paying for the increase twice – once for the raw product and again to get it here so we can refine and use it. (Learn more about this industry in The Baltic Dry Index: Evaluating An Economic Recovery.)
Depending on the type of business they are engaged in, companies will be impacted by rising oil prices in a variety of ways:
- Higher fuel and lubricant costs to run machinery and vehicles
- Higher bills for heating oil and other energy produced by burning oil
- Pay more for packaging
- Retail businesses that rely on customers coming to them by car may experience a drop-off in customer volume and thus reduced demand
- Businesses that rely on discretionary spending, such as travel destinations, will see fewer visitors
If businesses absorb these cost increases, that cuts directly into their bottom line. For publicly traded companies, that means lower stock prices for shareholders. If they pass the costs on to consumers, that means higher end-item prices and possible decreased demand for their products. (Learn a little more about the "non" part of this nonrenewable resource, see Peak Oil: Problems And Possibilities.)
The Bottom Line
Rising oil prices could have a very negative impact on the ability of the U.S. economy to mount a sustainable recovery. Consumers have to buy gas to get to their jobs and they have to put food on the table. At the moment, gasoline and food prices are experiencing more price inflation than many other commodities. That results in less discretionary income to spend on other things like entertainment, retail goods and travel.
If those sectors of the economy get hit as a result, there will be a ripple affect on other businesses that depend on consumer spending to stay profitable. With unemployment currently at 8.9% according to U.S. Bureau of Labor Statistics, rising oil will make it more difficult for businesses to expand and hire more people.