Contemplating the Fallout from Increasing Oil Prices

 |  Includes: DBO, OIH, OIL, USO, XLE
by: Tom Lindmark

Here’s a short update on the oil market from the Telegraph:

Many Western investors and politicians have been hoping “cheap crude” would see us through this crisis.

During the first quarter of this year oil averaged $42, compared with $94 during 2008. That has helped dampen inflation by keeping the lid on energy costs to households and firms but, with crude now 103pc above its mid-February low, cheap oil is no more.

That isn’t all of the article but it’s the nut of it. Between a declining dollar and increasing demand, the price of oil is rising quickly. It goes without saying that the implications for economic recovery of a rise in the price of oil are pretty negative.

One thought that’s rumbling around my mind is what this does to global manufacturing. If you go back a year at the height of the spike in prices, a lot of manufacturers were rethinking their manufacturing and assembly chains in Asia. It turned out that a certain point the costs of transportation outweighed the benefits of low wages. Accordingly, there was a move to bring some production back to the U.S.

I suspect that you need oil prices well north of $100 a barrel for that dynamic to set in again but if we start to threaten $75 a barrel in this economy it’s probably pretty easy to forecast much higher peak prices. If you throw in the political pressure to keep or grow jobs domestically how might manufacturers react? Could we see a move towards more domestically produced content and what would that mean for emerging economies?

Just some weird thoughts.