Friday, November 18, 2011

Why $100 Oil Will Tank The Economy

by Josh Saunders, Great Pacific Trading Company

Oil continues to mirror the run up in the stock market. The financial cheerleaders continue to talk the markets higher all the while failing to mention that oil has snuck back to nearly $100 a barrel. To make matters worse, Brent Crude is trading at $112 a barrel. As America enters the holiday season the pressure is going to be felt not only at the pump, but will also impact the kiddo’s present pile under the Christmas tree.

Driving to get grandma in Omaha may be a little expensive. Some families may choose to have Grandma attend the Christmas morning gift opening via Skype. Instead of paying those high gas prices and airline fuel surcharges, grandma can see the excitement on her grand kids faces on the webcam. Nothing really says family closeness and Merry Christmas like a cyber hug. At least it will be easier to hide the disappointment of receiving another pair of hand knitted socks instead of a new iPhone 4S.

The fundamentals for a bull case in oil continue to show an up trend. As the world population continues to grow, more citizens are moving up the social ladder and using items that require oil or its by-products. In China and India alone the increase in the net population will be nearly 20 million people this year. As these two economies continue to grow into affluence they will buy and use more and more oil.

Last year the people of China purchased 13.8 million cars. Between India and China they add approximately 95,000 new cars a day to the worlds roads. This is an ever increasing amount of oil consuming vehicles battling for a finite supply of oil. The world pumps 88 million barrels a day and some would say this figure has peaked.

crude oil price chart December 2012

Simple supply and demand would dictate that a finite supply with rapidly increasing demand should only increase the price of oil. While we may see some trading volatility, the trend for oil is going to be up. The only headline that could stop this rising trend would be some magic source of renewable energy and a way to effectively store it.

Well, GM has sold 5,000 Chevy Volts, but I think you get idea. As the holidays roll around, high oil prices will put a clamp on shoppers wallets. For an economy that derives nearly 70% of its GDP from consumer spending, this does not bode well going forward. Rising oil prices will slash any hope of the consumer lifting the stagnate economy.

There could potential be a small bump in holiday sales, but it will come only with a jump in consumer credit. We are talking about black Friday and cyber Monday deals here!

Fellow commodity junkie and personal friend Josh Saunders is VP of Northern California Operations at Great Pacific Wealth Management.

Twitter- @saundezj



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