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Oil prices, a catalyst for a W recovery?


beerbaron
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In November 2007 I remember having a discussion with my dad where he said that he was all in cash because he felt that oil prices were in bubble and that he has seen enough bubbles in his life to know that bubbles splattered in every markets. I don't know if he was right or just lucky but his reasoning seemed right and today he's much richer.

 

There is 42 gallons in a barrel, so the current price of oil is about 1.83 USD per gallon. Knowing that the oil consumption per capita is about 3 Gallons per day. That would mean that every 5$ of price increase will reduce the amount of money available for recovery of about 5$x303Mx3x365/42=39 Billions. I don't know about you guys but this number could put an end to any recovery plan. There is part of that number that should not be accounted because it's not all consumer spending but still if 2/3 is used by consumer were are still talking about quite a drag on consumer spending.

 

Do you guys think that oil prices could indeed stop any recovery and at what point would you start to be scared? I personally believe a close look should be kept on this commodity, to me, it's a much more important indicator then consumer confidence.

 

BeerBaron

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In short, we tend to have an over supply in durables (construction etc) after most booms. Basically the durables are catalysts for jobs. I dont see this depletion in the short term at all,thats why i dont see a recovery in the near future.

No (historically low) durables required, no new jobs created etc etc.

 

Your dad is wise as to KISS.

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I'm talking about a 5$ per barrel increase  ;)

BeerBaron

 

Common! We are entitled to better quality analysis on this board. Firstly, your figure should be $1,658 billion, not trillion. Secondly, if you are talking about $5 per barrel, then your number needs to be divided by 42 (the number of gallons in a barrel) giving only $40b! Thirdly, a $5/bbl increase in the price of crude does not translate into a $5/bbl increase in the price of gas (it would be more).

 

A simple reasonableness analysis should have alerted you to the error. Oil prices shot up about $100/bbl to $150 in 2008. If your number were right, the impact on the consumer would have been $33 trillion!

 

Your father may be richer but is it for the right reason? I don't have the price of crude in Nov 2007, but I believe it was not that much higher than it is now ($80-90 maybe). The markets collapsed because of problems in the financial system.

 

 

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I'm talking about a 5$ per barrel increase  ;)

BeerBaron

 

Common! We are entitled to better quality analysis on this board. Firstly, your figure should be $1,658 billion, not trillion. Secondly, if you are talking about $5 per barrel, then your number needs to be divided by 42 (the number of gallons in a barrel) giving only $40b! Thirdly, a $5/bbl increase in the price of crude does not translate into a $5/bbl increase in the price of gas (it would be more).

 

A simple reasonableness analysis should have alerted you to the error. Oil prices shot up about $100/bbl to $150 in 2008. If your number were right, the impact on the consumer would have been $33 trillion!

 

Your father may be richer but is it for the right reason? I don't have the price of crude in Nov 2007, but I believe it was not that much higher than it is now ($80-90 maybe). The markets collapsed because of problems in the financial system.

 

You are totally right, my calculation did not make the division by 42. I modified my original post to reflect that change. That is an unacceptable mistake I will verify my numbers twice in the future before posting.

 

I believe the financial crisys did of course start the recession, there is no doubt about it. But bad debts + increase in price did precipitate the issue. The price of oil in january 2007 was 46$ and raised to 86$ in November. This removed a lot of liquidities in the consumer's hands. The same thing might happen here if oil gets momentum.

 

BeerBaron

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Guest kawikaho

The USD is inversely correlated to the S&P and oil.  Essentially, and I've been saying this for quite some time, the financial bailout is a hefty tax in more ways than one to the American public.  I believe the USD is in for a rally next year, and it will tank equity and commodity markets.  I damn hope that happens.

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