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EnergyTomorrow.org – ETR 57 Oil Prices and the Economy
Jane Van Ryan talks with Howard Simons, strategist for Bianco Research in Chicago about the recent drop in the price of oil.
Comment Many of these topics were discussed in this Market Facts:
Even though crude oil prices may have exhibited some modest correlation to both the dollar index and to the yield curve since July, the simplest explanation is all three measures were affected by the global financial crisis far more than they affected each other. The crisis led to a drop in industrial demand, to a closure of dollar carry trades and to abrupt changes in monetary policy simultaneously and has led to coincidental correlation.
and this Commentary:
The treatment of petroleum prices in general and gasoline prices in particular is consistent with these observations. We have written a series of Market Facts noting the positive partial contribution of crude oil prices to the S&P 500, and others noting the weak and unstable contribution of energy prices to inflation expectations, and it is safe to say neither statistical demonstration has been embraced wholeheartedly.
We were asked many times during the September 2007 – July 2008 doubling of crude oil prices what it would take to bring them back down and we answered consistently, “A global recession.” Lower gasoline prices are of small solace in this context, ranking just above a 2% dividend yield on a stock whose price has fallen by 50%.
When the economy recovers, the long-term bull market in energy prices will return and will not derail that recovery so long as the economic value added by energy purchases exceed their total cost.