$120 Oil's Struggle with the Dow Industrials

Is this round two of the price of oil vs. the Dow Industrials?  Will the effects on the Dow of the 1973 Oil Crisis repeat itself?  There are several similarities and differences.  One similarity, which got me thinking, was that the percentage increase in oil prices was similar to today – albeit it happened slower this time. 

The chart below compares the 1973 Dow Industrials with the price per barrel of oil. The charts begin with oil and the Dow Industrials with relative values of one.

click to enlarge

 

This next chart shows the effect of the price of oil on the Dow beginning in July 2007 where again the price of oil and the Dow have a relative value of one.  After July 2008, the relative movements noted during 1973 Oil Crisis were used for forecasting. 

click to enlarge

This forecast assumed oil prices did not fall much below its peak – as the same happened in 1973.  A reduction in oil prices would obviously create a different model.

Using historical data to model the future is usually doomed to failure.  The situations between 1973 and today are vastly different.  However, understanding the effects of the1973 oil prices on the Dow is important in understanding its potential effects on the Dow today. It took the Dow almost two years to regain the value lost by the 1973 Oil Crisis and the continuing high prices of oil.

Finally, I am not suggesting oil prices are the biggest influence on the Dow today.  However, judging from 1973, the long-term effects of high energy prices cannot be ignored. 

Disclosure: Author holds long positions in GE and T - under $20K each.

 

 

Comments

[Ishortyou:]

Nah we will not use dark ages fossil fuel too much of a headache and too polluting, we gonna switch to new age technologies such as electric and hydorgen-water techs.

2008 Aug 06 08:52 AM

[investor88:]

Agree with conclusion. Interesting comparision of Dow and oil price trends in the 1970s and now. Conclusion of a very tough time in the years ahead is well supported by numerous other writers who analyse other factors like financial instability in the economy, cycle analysis. No wonder Steven can retire at 45 and stay retired, what with his practical philosophy of making money in the short term and long term, investing with the flow of the market.

2008 Aug 06 09:22 AM

[phdinsuntan...:]

even china was growing rice in those times is a very interesting comparison, including a weakened US financial position after a
expensive war (there is any cheap one?), the consequense is clear, we are just starting to experience inflation and the interest rate increase to 15% is 10 years in the future, gold must look cheap for Steven.

2008 Aug 06 10:44 AM

[Jason Rines...:]

Compliments Mr. Hansen. If you note my comments since March, you'll notice about every other comment me reminding investors about the market earthquake, tsunami effect.

I feel it is a responsibility to remind the investor community that after every market shock (March - Financial, June - Oil) That the real financial pain happens 3 or so years out. I remember 1987 and my food service teacher in high school showing me this. He was a retired Air Force base commander and a fine man.

The investor community has become more aware of bubble economics but historically the comparisons of now and then seem 1970's based on charts at this point and becoming the 1930's. I hate doom & gloom but love facts and research. The best money can be made in massive booms and massive busts. It seems you can become fabulously wealthy or fabulously poor and the research becomes very critical in which camp you find yourself in.

Your correct, regression models and other comparative research is not always perfect, but they are major indicators. This economy seems like it shed about half it's excess capacity from the March crash (shock, whatever you prefer) and the we saw a tipping point on consumer spending of more permanent demand destruction.

From here it seems it will be in a slow deflation over a three year period, cumulating to depressionary conditions and then based on Washington response, perhaps a recovery occuring in 2012 and Bull by 2013. Historically, global money problems create big military misadventure so my forecast may change based on such unpredictable geopolitical side effects/events. Thank you for taking your time to educate!

2008 Aug 06 10:59 AM