For A Quick-Read On U.S. Economy, Check Oil Prices

Don't have time to review the U.S. economic calendar -- what with work, family responsibilities, and all?

And pouring over the latest, summarized economic research by the U.S. Federal Reserve doesn't sound like an interesting Saturday afternoon to you, but you still want to stay plugged-in to the U.S. economy?

Well, you still can: use the oil price short-hand.

Oil: A Telling Barometer

The price of oil is a good, rough barometer for the U.S. economy. Don't misunderstand: it's not a perfect barometer, but it does provide a rough indicator of how the U.S. economy is faring, as well as the outlook for the world's largest economy.

Here's why:

Oil is the lifeblood of the U.S. economy, and, to a lesser extent, of the global economy. Oil is the world's most vital commodity. (That is, until some other plentiful, cheap, portable energy form comes along/is discovered to displace it.)

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Therefore, start with a neutral price of $70 per barrel in 2012 dollars (current dollars). That's equal to about a $51.50 per barrel price for oil in 1999.

The $70 price is relatively high and it's a level that makes almost every oil exploration project -- save selected oil sands and other non-conventional oil projects -- profitable.

Now, for a variety of reasons, the price of oil can't stay above $70 per barrel if the U.S. economy slumps and/or if the global economy falls into a recession.

Conversely, oil's price is unlikely to drop below and remain below $70 per barrel for a sustained period (six months or longer), if the U.S. economy is growing at a healthy rate.

To be sure, there are exceptions to the above rules: if the U.S. experiences a period of high inflation, or if a sustained war breaks out in the Middle East, or if a major oil producer (Russia, Saudi Arabia, Iran, Venezuela, Canada, or Mexico) cuts off oil production to the U.S./world, oil's price would jump, and GDP in the U.S./world would slump.

Two Handy Oil Charts

To monitor oil's price, check out IBT's commodities page, by clicking here.

Another good chart is at stockcharts.com at: http://stockcharts.com/h-sc/ui?s=%24wtic?

Oil closed Friday afternoon up 84 cents to $107.42. The price quoted is West Texas Intermediate Crude, and for a variety of reasons, it's lower than Brent Crude.

But use West Texas Intermediate: if the price is falling and continues remains below $70, know that institutional investors?(IIs) -- the finance world's most knowledgeable players -- are becoming more pessimistic about the U.S. economy.

Conversely, a price consistently above $70 indicates that IIs are bullish -- optimistic -- about the U.S. economy.

Crude So Far In 2012: Bulls In Charge

How has the price of oil fared recently? At $107, it's well above the $70 demarcation line. One qualifier in the metric shorthand is, of course, geopolitical risk. Concern that Iran may try to block the Strait of Hormuz (a major oil artery), impose an oil embargo, along with civil unrest in Nigeria, have added a roughly $10 to $20 "geopolitical risk premium" to oil's price. Without question, problems in important oil producing nations have added to oil's price, but investors/readers should keep that variable in perspective: it doesn't account for all of oil's surge.

Another qualifier, or factor boosting oil's price: strong oil demand in emerging market economies, particularly in China. That's added another $5 to $15 to oil's price.

Hence, in other words geopolitical risk and emerging market growth have added $15 to $35 to the price of crude, or crude would be trading at roughly $70 to $90 per barrel, not $107.

What's that $70 to $90 per barrel adjusted price saying? As noted, it's saying that institutional investors are slightly bullish regarding the U.S. economy's growth prospects during the next 6-9 months.

And, recent U.S. economic data support that more-encouraging outlook by institutional investors: U.S. job growth in the past six months has been the strongest that it's been in the past 12 years, including 227,000 new jobs in February, and an average of 202,000 per month in the past half-year. Also jobless claims are trending lower, and GDP, while not stellar, suggests the economy will expand 2.5% to 3% in in 2012.

However, don't mis-read the $70 to $90 adjusted oil price: it does not mean institutonal investors are saying the U.S. economy is likely to register GDP growth at a "Roaring 20s" rate in 2012, or even at a "Roaring 90s" rate. The $70 to $90 adjusted crude price indicates that institutional investors are cautiously optimistic, not ebullient.

Another caveat: if oil demand increases too much, oil's price could rise to levels few economies can tolerate -- above $130 per barrel -- and that would slow the U.S., European, and emerging market economies; it could even tip the U.S. economy back into a recession.

Hence, it's important to understand the oil price short-hand: a strong oil price is a bullish sign; a too high oil price is bearish.

Finally, there's a supply factor caveat to the oil price short-hand: if global oil supply does not continue to increase, that too, could push the price of oil to unacceptable levels -- triggering a recession in the U.S., and possibly in other economic regions, as well. So far, global oil supply is increasing at a pace that should be able to meet global oil demand (aided by reduced per capita oil demand in the developed world). As long as that supply increase trend continues in the current decade, the oil price short-hand will remain a meaningful gauge of U.S. economic health.

In summary, for a quick-read on the U.S. economy, check the price of oil. If falls and stays below $70 per barrel, that's a danger sign for the economy. An $85 to $105 current price (or a $70 to $90 adjusted price, excluding the Middle East unrest and emerging market factors) is a sign that institutional investors are optimistic about the U.S. economy's growth prospects for the next 6-9 months.

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Source: http://www.ibtimes.com/articles/312295/20120310/oil-prices-gasoline-jobs-economy-gdp-obama.htm

joe torre west virginia university michele bachmann jessica biel tim howard west virginia rob roy