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$100 Oil’s Winners & Losers

$100 Oil’s Winners & Losers

The price of a barrel of oil is up 300% since 1999 yet nearly all regions of the world continue to see their economies moving ahead full steam.

What would happen if oil tops the psychologically important $100/barrel mark?

Think it’s far-fetched? Not so. There’s fighting in the Middle East, voracious Chinese demand, concerns about Nigeria and hurricane season is right around the corner. Will we see outages as we did in the aftermath of Katrina?

We’re always concerned when we’re told “it’s different this time” but it’s true about global energy prices – at least partially so. Oil prices rose in the 1970s due to supply concerns. Today, oil prices continue their upward march due to intense global demand.

Where things will be no different this time will be the impact of a supply/demand imbalance. Here’s what we think might happen…

High-end retailers will continue to perform nicely but Wal-Mart, Target and the rest of the discounters better harvest their acorns for a long winter. We’re already seeing signs of a slowdown at $75/barrel. GM and Ford, two companies heavily reliant upon SUVs, will drag the domestic auto industry deeper into despair. GM’s turnaround will come to a screeching halt while Ford, previously forced to cut its dividend, may teeter on the brink of insolvency.

Think interest rates are cooling off the housing market? Think again.

Higher energy prices will force consumers to expend a greater percentage of their disposable income on transportation and heating/cooling leaving fewer dollars to buy real estate and furnish homes.

Corn is a key ingredient in many of the food and beverage products we buy. If farmers decide to sell to distilleries for ethanol production instead of to the food industry, we’ll see prices rise for everyday items such as chocolate, cereal and soda.

The dual yet oftentimes competing mandate is to promote price stability and economic growth. Rising prices are a bad thing so Ben Bernanke and his bunch will look to raise rates. Increasing rates slow the economy so Ben Bernanke and his bunch look to lower rates.

Getting dizzy yet? The markets are already mixed as to whether The Fed is done tightening, if more is to come or if they’ve already overshot their desired “soft landing”. Things will only get worse if oil tops $100/barrel.

It may be blasphemy to use Europe and safe haven in the same sentence but so be it. Most of Western Europe, particularly the Germans, runs highly efficient industrial operations powered by natural gas and nuclear sources. European drivers are already use to high gas prices due to exorbitant taxation. The strong Euro would offset a sharp increase in Dollar-denominated oil.

The impact here will be mixed. Japan is highly dependent upon oil but they’re efficient users of energy. China can’t seem to import enough oil and they’re terribly inefficient at burning it. However, their chief concerns are an out of control GDP and a potential plunge in U.S. demand for inexpensive Chinese goods. Countries such as India, Malaysia and Indonesia will be hit hard as their factories are among the most inefficient.

Uh-oh! The last thing we need to do is fatten the wallets of the Iranians. They’re already pursuing nuclear weapons and funding Hezbollah. Then there’s the quagmire we call Iraq. National instability would only be made worse if we upped the stakes by increasing the value of their oil supplies.

In the end, the global economy is driven by a lot more than just the cost of oil. However, $100/barrel is just the kind of psychological torture an already anxious consumer doesn’t want to deal with.

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