08 Apr 2005 How High Will It Go?
The buzz continues about the potential for increasing oil prices to ruin the economic expansion. Indeed when oil prices fall, stocks go up and vice versa. With crude just under $54.00 economists have had to revise their opinions of what price would trigger recession. According to the Wall Street Journal, last summer, one-third of economists who participated in their survey said a recession would follow if crude-oil stuck between $50 and $59 a barrel, the range traded since late February. In the latest forecasting survey, none of the economists feel that $50 oil will trigger a recession. About 31% said oil would have to be sustained at $80-$89 a barrel to snuff out growth, while 48% believe crude would have to top $90. In inflation-adjusted dollars that is the level oil reached back in the 70’s during the oil embargo.
There are many differences between today’s economy and the economy of the 70’s, however. Today, oil is being supplied as fast as it possibly can be to meet demand, whereas supplies were controlled and restricted in the 70’s. Today’s economy is much more efficient and less dependant upon oil than it was then. Thanks to the Fed, significant liquidity in the financial markets is available to pay higher oil prices. The economy remains strong and growth oriented in numerous other areas as well, offsetting the drag of oil prices.
In fact, oil seems the only holdout in this continuing recovery. When and how high prices will go remains to be seen, but gravity and common sense argue that the sky is not the limit. The guidance of Lee Raymond, CEO of Exxon Mobile seems more credible than that of the frantic oil traders and hedge funds. Mr. Raymond, a long-term thinker, says he bets they are coming down and that the industry will fill demand.
What we know is that the economy continues to grow. First quarter U.S. GDP growth should hit 4%, corporate earnings appear in large part to be better than analysts’ projections, and federal revenues are rising at a nearly 10% year-over-year rate.
What we wonder is whether inflation will spoil the party. Some suggest that the Fed has kept rates too low for too long. But just as the inflation fears crept back into the markets signs began to appear that growth might be slowing somewhat. Employment numbers remain good, but the pace of improvement in March was the slowest in eight months. Economists expect GDP to fall from last years’ 4% pitch to a more reasonable 3 to 3.5%.
Commodity prices appear to have peaked. Neither gold nor the dollar are acting like inflation is a threat. And I have already mentioned that long-term bond investors have actually bid rates down a bit in the past couple of weeks. Inflation, so far, seems to be under control, but time will tell.