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January 13, 2005

All about oil

Amey Stone

It is really hitting home this week how much the U.S. economy and the stock market are driven by the price of oil. And, so far this year, the price of crude oil traded on the New York Mercantile Exchange, is on the rise. It started the year at $42 a barrel and is now at $47. The price of gasoline is also ticking up. After falling for eight weeks in a row, the national average for a gallon was $1.79 on Monday, up 1.5 cents from last Monday.

Here are some recent data points that make me realize why this new uptick bears watching:

Yesterday the U.S. trade deficit hit a record $60 billion in November. It is likely to total more than $600 billion for 2004. My expectation was that the weaker dollar would lead to a smaller trade deficit, since it makes foreign goods more expensive at home, reducing demand. But that analysis didn't factor in that Americans will import crude no matter what the price (and the price of oil actually fell in November). If oil rises further, the already-worrisome trade gap will increase more.

Today we see strong retail sales for December. But, as I noted in a story last week on consumer spending, holiday shopping had had an inverse relationship with the price of gasoline this year. The more gasoline fell, the more people spent at the malls. If it heads back up here, what does that mean for consumer spending in 2005?

Then there's corporate earnings. As I wrote in a blog posting earlier this week, Fourth Quarter Earnings Worries, fund manager Margie Patel believes higher oil is leading to higher component prices (everything plastic, after all, is a derivative of petroleum), which most companies can't pass along to customers. She expects earnings season to disappoint mainly for that reason. Stocks are down so far this year as more investors catch her drift.

10:59 AM

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