Proof That The Experts Can Be Wrong: They’re Taking Different Sides On The $100 Oil Argument

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The price of oil scraped $100 per barrel yesterday and the experts haven't stopped talking about what that will mean to the U.S. economy.

Some say that it will push the economy into recession.  That would be good for mortgage rates.

Some say that it will push the economy into inflation.  That would be bad for mortgage rates.

Some say it will do both at the same time, a condition called "stagflation".  That would be awful for mortgage rates.

Either way, it's like The Truman Show.  Everybody's talking about it and nobody knows how it's going to end.

Just look at the screenshot above, taken from yesterday's Wall Street Journal.  Two pieces were running on the same topic: one saying oil prices will go up, the other saying they'll fall. 

That's indecision at its best (or worst).

Let's put the rising oil prices in perspective.

• In 2004, oil passed $40 per barrel
• In 2005, oil passed $64 per barrel
• In 2006, oil passed $78 per barrel
• In 2007, oil passed $95 per barrel

And today, oil touched $100. 

Yet, over the last three years, the economy has not materially slowed down because Americans continue to propel the it forward with spent dollars.

It takes 10-14 days for oil prices to work their way to gas stations, so before we start speculating about how Americans will react to higher gas prices, we can tune into tomorrow's jobs report. 

With oil prices up, expect traders to be hyper-sensitive to variance from the 70,000 expectation.  Anything lower, rates should fall on recession worries.  Anything higher, rates should rise on inflation fears.

Even though the variance is insignificant.

Source
Weakened U.S. Economy May Be Facing New Test
Sudeep Reddy
The Wall Street Journal Online, January 3, 2008
http://online.wsj.com/article/SB119930367405362875.html