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What would provide both a nice 'tax cut' for Americans and boost the U.S. economy, as well? A slide in oil's price to about $45-50 per barrel. And wouldn't the sound of $45 oil be music to policy makers' ears?
Rising gasoline prices most certainly pose a risk to the U.S. economic recovery, and the reverse, a decline, provides a tailwind. Every $1 per barrel drop in oil's price increases U.S. GDP by $100 billion per year and every 1 cent decrease in gasoline's price increases U.S. consumer disposable income by about $600 million per year.
Further, from a fundamental standpoint, oil should be trading considerably below it's current $75-80 price: inventories remain high, with only modest demand. However, as many investors know, oil's price over the past 18 months has been largely disconnected from its supply/demand fundamentals: other factors, including the use of oil as an alternative asset and as a hedge against a weaker dollar, have boosted crude's price.
Early Wednesday, the fundamentals tried to push to the forefront, as oil, which has jumped about $5 in a week, traded down 31 cents to $76.92 per barrel at mid-day.
Energy/Economic Analysis: From an investment and a macroeconomic standpoint, one can't underscore enough the impact of crude's price on the world's largest economy. Simply, crude trending toward $90 per barrel really cuts into disposable income and increases business costs, and a plus-$100 oil price jeopardizes the economic recovery. Most investors can intuitively sense the impact of high oil prices: in general, U.S. consumers looking at $3.50 to $4 per gallon gasoline won't be in a spending frame of mind.
Conversely, take the price of oil down $50 or $45 per barrel, with gasoline prices below $2.50, and the ripple effect is felt throughout the economy: it is similar to the stimulative effect of a tax cut.
Early Wednesday, the fundamentals tried to push to the forefront, as oil, which has jumped about $5 in a week, traded down 31 cents to $76.92 per barrel at mid-day.
Energy/Economic Analysis: From an investment and a macroeconomic standpoint, one can't underscore enough the impact of crude's price on the world's largest economy. Simply, crude trending toward $90 per barrel really cuts into disposable income and increases business costs, and a plus-$100 oil price jeopardizes the economic recovery. Most investors can intuitively sense the impact of high oil prices: in general, U.S. consumers looking at $3.50 to $4 per gallon gasoline won't be in a spending frame of mind.
Conversely, take the price of oil down $50 or $45 per barrel, with gasoline prices below $2.50, and the ripple effect is felt throughout the economy: it is similar to the stimulative effect of a tax cut.
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Reader Comments (Page 1 of 1)
2-03-2010 @ 3:57PM
Iridium said...
Hey Joe,
What happened to your "Don't complain about gas prices, invest in oil company stock" argument?
The fundamentals of the oil market don't even support $50 per barrel. They barely support $20 per barrel right now. Global oil demand is below the levels when we had $.79 per gallon gas at the turn of the last century, and not at the turn of the 1800s but ten years ago.
Even at $50 that price represents a doubling of oil's historical average price. It is an impossible notion that global oil demand has increased enough in ten years to support a doubling of the historical average of a commodity. You could make a case if there was a severe supply shortage but we have more oil right now than almost any time is history and the peak oil myth has pretty much been dis-proven at this point.
Speculators still control the price of oil and they will not let the market fall to its real and unmanipulated level. Every average American will continue to be robbed blind until the Wall Street stock exchange hangs a huge closed sign above the doors.
2-03-2010 @ 9:21PM
Chris said...
Would that tirade against speculators include the 1.3 billion speculators in China, the 1.5 billion speculators in India, and the 500 million speculators in South America?
The world has changed.
2-03-2010 @ 6:01PM
MyKisa said...
drill here drill now
2-03-2010 @ 6:25PM
thedude said...
13 months ago oil was around $33 per barrel
Remove oil from speculation and all trading - Freeze the price at $25 per barrel. This would result in savings in nearly every aspect of life from transportation (including personal cars, air travel, and bulk transport deliveries) to energy generation
Oil is too essential to so many lifes factors that it should not be considered a commodity, it is a necessity.
The only reason oil costs as much as it does is due to speculation and trading of futures.
2-03-2010 @ 7:11PM
acbarger said...
GO AHEAD AND FREEZE THE PRICE OF OIL AND ALL THE COMPANYS WOULD STOP DRILLING YOU CAN'T DRILL IF IT COST YOU MONEY INSTEAD OF MAKING IT
ALSO IF THE INSURANCE COMPANYS ARE FORCED TO SELL PEOPLE THAT ARE ALREADY SICK THEY WILL STOP ALSO
YOU CAN NOT PRODUCE ANYTHING BELOW COST AND STAY IN BUSINESS
2-03-2010 @ 7:16PM
Joseph Leslie said...
In 1978, I was under contract to the US Deparment of Energy. Our task (about 350 of us) was to develop a conservation and renewable energy program that would cut our rependance on OPEC oil.
In 1979 we were ready to start rolling out the program, but Ronald Reagan was elected. The first thing he killed was our program. "The US Government has no business in the energy business", was Reagan's slogan. All development on our program was stopped! The Tax Credits for alternative energy were allowed to expire and here we are today. Slaves to the whims of OPEC!