Economic Commentary: Oil and More

 

It All Heats Up

 First Tunisia. Then Egypt. The protests have spread over North Africa and the Middle East. But the markets, especially oil, did not get really spooked until the action in Libya intensified. What is the difference? Libya is an oil exporting nation. Not only have the protests in Libya affected oil supplies, the markets are now thinking about what happens if a country like Saudi Arabia is next. There is a big difference between the less than two million barrels per day that Libya produces versus the more than eight million that Saudi Arabia produces. Right now the Saudis represent a potential escape valve that can minimize short-term disruptions. After easing back over the past few weeks, oil prices shot back over $90 per barrel during President’s Day and topped $100 per barrel by mid-week.

Some analysts are predicting that $4.00 per gallon gasoline could be seen this year. Last week we spoke of two obstacles for the economic recovery to overcome. One is real estate. Another is shrinking government stimulus. High gas prices are also a potential barrier to economic growth. Right now consumer confidence is at a three year high. Nothing can cause consumers to cut back more quickly than having to pay $4.00 at the pump. Are we saying that this is going to happen? Absolutely not, but this is the reason that events overseas are dominating the headlines. Bringing democracy to other countries is a good thing, but economic disruptions can cause hardships in the short-run. If there has been any benefit to the run-up in oil prices, it is the fact that rates have eased back down for the moment. Earlier when oil prices spiked, rates were going up as well because the causal factor was strong economic news. Lower rates are the one thing that can help cushion the pain of higher gas prices.

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