Get Ready for Oil Price Volatility to Kill the ‘Recovery’

Get Ready for Oil Price Volatility to Kill the ‘Recovery’

by Gregor Macdonald, contributing editor

Tuesday, March 13, 2012

Executive Summary

• The market is losing faith in the transportation sectors ability to deal with $100+ oil
• Why greater volatility in the price of oil is a safe bet in 2012
• Why oil has a hard price floor and soft price ceiling
• How greater oil price volatility will (negatively) impact the global economy

Part I: Understanding the New Price of Oil

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Get Ready for Oil Price Volatility to Kill the ‘Recovery’

To the extent that the US economy has been redefined as the health of its corporations, rather than the health of its people, it makes sense that many may hold the view that oil prices have an “unclear” effect on the economy.

To be sure, if your corporation is sited in the US and your labor force is manufacturing goods in Asia — which runs on coal — then at least for a while, a shield from rising oil prices can be sustained. However, the 2 mbd taken offline from US consumption and the 1.0 mbd taken offline in Europe over the past seven years have removed about as much discretionary demand as possible. From this juncture, the next layer of demand to be removed will directly impact the industrial economy, especially through its transport and logistics systems.

As we came out of the September 2011 lows in global stock markets and oil once again regained the $90 level, I began to watch the Dow Jones Transportation Index (TRAN) for signs of recovery or recession. As many of you understand, I have been a long-time advocate of rail transport for its outsized advantages compared to trucking and automobile transport, owing to its incredible energy efficiency. And the railroads have indeed thrived in the first stage of Peak Oil, taking share away from trucking.

However, despite strength in the TRAN, largely owing to the representation of railroads, there is still a large portion of the global economy running on airlines, trucking, logistics, and delivery services.