Is the economy set on "rebound"?
That’s kind of what some pundits are hinting with the latest "official" unemployment numbers.
But as the three of us noted on yesterday’s podcast, that number is only a slight glimmer in an otherwise dark picture. And the underlying unemployment numbers (and trends) don’t really support the reduction of last week (the number of new private sector jobs was not enough to maintain the unemployment number). Or said another way, it is most likely a temporary blip. Another ominous development that doesn’t bode well economically is the precipitous rise in oil prices and the impact that will have on any recovery. In a word, the impact it will have is "bad".
Oil is one of those commodities that has a very broad impact on economic activity. It is, until an alternative or substitute is found, the literal life-blood of our economy.
How does oil staying in the $104 to $107 a barrel range sound? Not very good, obviously. As one refiner told me, his only control over how much the fuel he refines costs when it leaves his refinery is the economies he can wring out of his equipment, but the cost of the goods coming in are beyond his control. So that cost per barrel is what he’s paying as the crude shows up at his refinery for processing.
How long will it stay over $100 a barrel? Well, many are saying quite some time:
Oil prices climbed to near $106 a barrel Monday as intense fighting between Libyan government forces and rebels appeared to be turning into a civil war and raised the prospect of a prolonged cut in crude exports from the OPEC nation.
By early afternoon in Europe, benchmark crude for April delivery was up $2.25 to $106.67 a barrel, the highest since September 2008, in electronic trading on the New York Mercantile Exchange. The contract had gained $2.51 to settle at $104.42 a barrel on Friday.
Citigroup said it raised its 2011 average forecast for Brent crude to $105 from $90, but doesn’t expect the violent protests in North Africa and the Middle East to spread to Saudi Arabia, the world’s largest oil exporter.
"We assume that output disruption is maintained through the second quarter," Citigroup said in a report. "Output disruption, or at least the threat of, will support a fear premium for the rest of 2011."
As mentioned in the article, most now view the war in Libya to be a civil war. And, reports today say that Gadhafi’s forces have had some successes against rebel forces (apparently neither side is particularly swift in the combat portion of battle). Reports also point to other countries possibly helping the rebels. And we know there are "friends" of Gadhafi, mostly found in the socialist South and Central American countries, who will try to help the dictator maintain power.
The initial shock of the turmoil in Libya has worn off the markets and they are now looking at a prolonged reduction of capacity with Libya off line. And, we’re seeing unrest in other Arab oil producing states as well. Unrest, or instability, drives the price of oil up.
So it isn’t surprising that in the last two weeks, the price of gasoline rose at its second fastest pace ever:
Gasoline prices in the United States posted their second-biggest increase ever in a two-week period, due to the rise in crude oil prices stemming from the turmoil in Libya, an industry analyst said Sunday.
The national average for a gallon of self-serve, regular gas was $3.50 on March 4, according to the Lundberg Survey of about 2,500 gas stations, up 32.7 cents from the previous survey on Feb. 18.
The most it ever jumped was in 2005 when hurricane Katrina hit. But that was soon solved because the event itself wasn’t prolonged as is a civil war. So chances are, this isn’t the end of the rising price of gasoline.
As you might expect our national leaders have managed to put us in a position where we essentially have nothing to answer with domestically. In fact, as I recall, we’ve been told repeatedly for the last 20 or so years that bringing significant new assets on line would take at least 10 years or so and thus, I guess, shouldn’t be done. Er, yeah, ok and where would we be now if we had committed to that 10 years of bringing them on line 20 years ago? At least better off than we are now.
And most likely not talking about using the strategic reserve I’d bet. FYI, the strategic reserve is not supposed to be a tool for the use of politicians to drive down the price of gasoline when their failed energy policies show up at the pump. It is a reserve for use by our military in case we’re cut off from the foreign oil we’ve become even more dependent upon.
But back to the economy.
Does anyone really need an explanation of the impact higher fuel prices will have on a barely recovering economy (not to mention unemployment)? And, with the specter of inflation rising – not to mention food prices – how likely is the impact to be “minimal”?
Yeah, it’s not.
And, as usual, we’re in a basically no-win situation thanks to the foresight of our elected leaders and their wonderful job of putting a practical energy policy in motion. A 10 month drilling moratorium (and the jobs that go with it) with no real end in sight.
So to the original question – is the economy set to rebound?
Unfortunately if it was, it most likely will be one of the shortest rebounds in history.