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Has Oil Reached the Tipping Point?

Posted By Barry Ritholtz On August 24, 2005 @ 8:45 am In Commodities,Economy,Investing,Retail | Comments Disabled

One of my favorite pastimes is watching the analytical
process of economists and strategists adapt (or not) to each new dynamic.
Paradigms are discussed, data is crunched, Econometric-models get reworked (too
often for the worse [1]).
Recognizing change is but the first step to preparing portfolios for any and
all eventual repercussions.

The most prominent version of this has been the general
reaction to the rising price of Oil. Our vantage point in observing this comes
from our Bullish stance on energy (December 2003 [2]).
We have watched the punditocracy go through 5 stages of Grief [3]
as oil ticked ever higher.

Be it out of Anger or Depression [4],
one common lament is that high Oil prices are a tax; they are not. Despite the
cliché, they are actually worse than taxes: they send US dollars overseas,
worsen the Current Account Deficit, and put a drag on consumer spending, as
well as business hiring and CapEx. Taxes, however inefficient a mechanism they
may be, at least get spent domestically – and as any good Keynesian [5]
(i.e., President Bush or Fed Chair Alan Greenspan) will tell you, the impact of
hiring teachers or police, rebuilding highways, etc. is to stimulate economic
activity. Not so with sending Petrodollars to the Middle-East.

As we noted last week [6],
the impact of this is at long last being felt. The evidence reveals consumer
energy expenses are dragging down spending. Energy costs are an insidious form
of economic friction. They exact a cumulative drag on pocketbooks and psyches
alike. Those Economists who have use the example of high oil prices as proof of
the economy’s strength may not have fully considered the ongoing fatigue high
fuel prices exert – eventually – on the consumer.

Nowhere is this phenomenon more evident than in Wal-Mart
sales data. As the nearby chart shows [7], Wal-Mart’s out-performance is highly
dependent upon falling fuel prices. When gasoline prices are not dropping,
their out-performance relative to other retailers disappears.

Here’s the paradox: Wal-Mart is the leading importer of
Chinese goods. Yet the blame for high Oil prices is due to in part to the
enormous activity in China, itself a response to the Feds massive stimulus [8].

Thus, conservation methods won’t have much of an immediate impact on Oil
prices. Consumers here can drive less and buy smaller cars, but the impact will
be de minimus, as the primary demand driver is China, responding to consumer
demand for their products in the U.S.

Incongruous though it may seem, so long
as Oil stays pricey, it will boomerang back to hurt WAL-Mart’s sales – who
started China on their present economic path.

Who ever said economics wasn’t ironic?


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/08/has-oil-reached-the-tipping-point/

URLs in this post:

[1] for the worse: http://bigpicture.typepad.com/comments/2005/08/revised_leading.html

[2] December 2003: http://www.businessweek.com/magazine/content/03_52/b3864629.htm

[3] 5 stages of Grief: http://www.amazon.com/exec/obidos/ASIN/0743266285/thebigpictu09-20

[4] Anger or Depression: http://dying.about.com/cs/glossary/g/g_5Stages.htm

[5] Keynesian: http://www.econlib.org/library/Enc/KeynesianEconomics.html

[6] last week: http://bigpicture.typepad.com/comments/2005/08/energy_finally_.html

[7] nearby chart shows: http://bigpicture.typepad.com/comments/2005/08/chart_of_the_we_2.html

[8] Feds massive stimulus: http://bigpicture.typepad.com/comments/2005/04/understanding_t.html

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