Oil Prices Predict a Growing Economy
By Mel Miller
Fourth in a series of economic updates focused on key recession indicators.
It is often tempting to confuse correlation with causation. For example, just because there is a positive correlation between the length of women’s skirts and the stock market does not mean that one causes the other. But when it comes to predicting recessions there is a correlation that, in my opinion, is a causation factor—the price of oil.
Unfortunately, the United States is driven by cheap energy (please pardon the pun, this is serious business). Granted, the sustainability movement is changing the energy landscape as more and more citizens are made aware of the environmental risks of fossil fuels, but until the majority stop relying on oil, coal, and gasoline, I feel the price of oil indicator will be a valuable statistic to monitor.
History has shown us that six of the last seven recessions have been preceded by a spike in energy prices, as the chart illustrates.
Since the price of oil fluctuates daily, what constitutes a spike which would bring about a recession? A 20% year-over-year increase is the generally accepted trigger point. The demand for gasoline, as an example, tends to be inelastic (miles driven do not decline given an increase in price) until the price approaches $4.00 per gallon.
What is the prospect for the future price of oil? Based on the futures market, the price of oil is expected to decline by approximately 10% during 2014. If the projections are correct, the oil indicator is pointing to a growing economy and not a recession.
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Posted: December 18, 2013