Archives For Oil

Interesting chart I found on the WSJ website late last week:

Correlation between Brent crude and the S&P 500

This chart compares Brent Crude—the oil used to make gasoline—and the S&P 500. I wish I had the numbers going back further than this because it would be interesting to see the correlation over the years. I would think the correlation would be almost non-existent prior to oil’s massive runup in the early 2000s. All I know is that lately it seems as though when the stock market goes up, the price of oil goes up too. When the stock market drops, the price of oil drops. It almost looks as though the price of oil dictates where the market is going. I could be totally wrong on this (I’m not an analyst), but it’s what it looks like to me.

All this brings up a question:

Are high oil prices bad for the economy?

Here are the total returns for the S&P 500, MidCap 400, SmallCap 600, and other Indexes(May 2012)

For the S&P 500, this May’s -6.01% was the worst May since May 2010 when the index was down 7.99%. Other than 2010, we would have to go all the way back to 1962 to find a worse performance than this May’s.

Oil was way down, which is a good and bad thing. It’s good because we like paying less at the pump. It’s bad because it’s probably only down due to the economic outlook. Take a look at how closely oil and the S&P 500 track each other (click on the chart to see a larger version):

Oil and the S&P 500

The solid line represents oil (right axis) and the bars represent the S&P 500 Index (you guessed it…left axis).

This bothers me. Why? Because as soon as the S&P 500 starts moving up (which usually implies the economy is getting better), the price of oil goes with it. The price of oil can only go so high before it has a negative impact on the economy. I wish we had better oil data. I would love to see longer horizons for comparison charts.

Chart of the Day: Oil

May 23, 2012

Oil is down 14.65% for the month of May.

Oil Prices Are Dropping…

October 4, 2011

Oil prices appear to be the lowest they have been over the last year:

I just wish gas prices would drop just as quickly. If my memory serves, when the price of oil surged earlier this year to $114 per barrel, gas prices surged to around $3.60 per gallon (around where I live anyway). Now oil prices are down to around $76 per barrel (a 33% drop). If gas prices decreased the same amount, we would be paying $2.40 per gallon instead of the $3.20 we are currently paying (an 11% drop).

I saw this article on MSN: Why You Should Love $5 Gas.

Some of the author’s (questionable) reasons:

Fewer people will die. Fewer people on the road meand fewer people will die.

Higher prices will lead to lower prices. Theoretically the government will open up the floodgates and more oil will be produced. Hasn’t happened yet (as far as I know).

End of wars because they’ll be too expensive to fight. Interesting…

We’ll starve despots out of existence. Wow. Gas prices are high because oil prices are high. Worldwide demand for oil is high. If the U.S. doesn’t buy oil from despots, they’ll simply sell it to China or India. We aren’t going to starve anyone out of existence.

People who make more money can ride out the surge in gas prices. It’s the people at lower income levels who don’t want to hear how high gas prices are a good thing.

Yesterday’s WSJ had a little article about gasoline futures. They explained that gasoline wholesale prices were back below $3/gallon due to easing concerns of flooding along the Mississippi River.

One thing I learned from the article is that retail gasoline prices are typically about $.70 higher than the wholesale level. They quoted the price for reformulated gasoline blendstock (RBOB) at around $2.93, which would put retail prices at around $3.63 a gallon. I paid $3.749 this morning.

Regardless, I have a feeling that any price drop is temporary.

One thing in the article that I think is a misprint is this (bold mine):

Worries that the floods would disrupt gasoline production pushed the RBOB contract as high as $3.39 a gallon last week. That sent gasoline’s premium to crude oil soaring to an all-time high above $40 a gallon.

The premium, called the “gasoline crack,” has since plunged to below $26 a gallon. That means smaller profits for refiners.

I’m not sure, but I think those should read “$40 a barrel” and “$26 a barrel.”

I was going through my email and found a link to this interesting interview with Peter Schiff, author of one of my favorite books from last year, How an Economy Grows and Why It Crashes*. I thought this question and answer was interesting:

Question: So, with a more thoughtful and sober monetary policy from the central banks like the Fed and others, you’re suggesting that maybe oil demand wouldn’t be as high?

Schiff: Well, if you went to an auction and everybody had $100, nothing would sell for more than $100 because nobody would have more than $100. If you gave everybody $1,000 and you auctioned off the same merchandise, it would sell for more money because the people that are bidding have more money to bid.

And that’s what’s happening. All the central banks are printing money, and now that money is there, that money is chasing oil. They’re not pumping as much oil as the central banks are printing money. The supply of money is growing much faster than the supply of oil, so therefore the price of oil has to rise. That’s what’s going on.

The ironic thing about it is the Federal Reserve is likely to respond to higher oil prices by printing even more money, claiming that the higher oil prices will slow the economy. And they think that what they need to do is stimulate to offset that. And of course, by doing that, that just means oil prices will rise even faster, because then there will be even more money. The process will continue, on and on.

There’s no mention in the interview of speculation. Interesting.

*Affiliate Link