Here we go again: $100 oil

By Money Matters Editors

The U.S./global economic recoveries are underway, that we know. What economists and sector analysts don’t know is the whether this recovery has legs, i.e. whether it is sustainable.

Regarding the United States, the world’s largest economy, the upturn in U.S. manufacturing is one of four, key economic expansion/contraction indicators and the main reason most economists believe the economy is expanding.

However, the other four – sales (sluggish), incomes (stagnant), and payrolls (still declining), do not point to a recovery. If the three aforementioned don’t begin to trend higher, the sustainability of the rebound will come under serious questioning, as opposed to just muttering and ‘devil’s advocate’ critiques one hears now.

What’s another factor that could stop the recovery in its tracks? You guessed it: the price of oil. Institutional investors (IIs) have bid-up the price of oil to about $80 per barrel, partly as an asset play and partly due to fears about inflation. Oil is serving as a ‘temporary surrogate currency’ or ‘surrogate gold’ right now. But oil also is rising due to projected increasing demand in emerging markets – where the economic recovery appears to be on sounder footing. Given the latter, OPEC needs to increase production at its next meeting: if it doesn’t, $100 per barrel oil seems to be a certainty in 2010, and that would be counter-productive.