Wednesday, May 11, 2005

On 11 October 2004, Stephen Roach opined,
In the end, the nature of the oil shock is the biggest wildcard in all this. Many are inclined to dismiss the recent run-up in oil prices as a non-event insofar as macro impacts are concerned. A common pushback I hear is that since oil prices are still low in real terms -- in fact, well below levels of the early 1980s -- they aren�t squeezing consumers. Yet macro tells us that price changes matter more than levels: At $50 on a WTI basis (now well below the latest quote of $53 on 8 October), the real oil price is fully 66% above the average that has prevailed since early 2000. That�s a shock in my book. Then there is the view that I always hear around oil-shock time -- that energy conservation has reduced the importance of oil in the macro equation. Try telling that to over-extended consumers.

Duration is obviously key in all this. If the oil price quickly reverses course, its shock effect will recede just as fast. I have stressed the three-month time threshold as the functional equivalent of a psychological breaking point.
Those following the bouncing ball closely will remember that back in Fall 2004, WTI spot prices closed above $50/barrel for only one month and then proceeded to fall back rapidly. By 10 December oil (WTI spot price) closed at a mere $40.71/barrel and the "oil shock" threat became just a bad memory.

Fast forward to 22 February 2005 when spot prices closed above $50 once again. This time, however, except for a few brief blips under the magic level, prices have remained consistently buoyant above the $50/barrel mark and in less than two weeks will have reached Roach's magic 3-month "psychological breaking point".


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