The Greatest Threat to the US Recovery

04/16/2012 9:00 am EST

Focus: COMMODITIES

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

Even though gas consumption in the US has declined, crude oil prices have continued to rise, presenting the “single greatest threat” to the US economic recovery, says Boris Schlossberg.

We’re here with Boris Schlossberg, who’s going to talk about the oil markets, what’s happening out there, and what we can expect in the future.

I think the oil market has been bewildering to most analysts. It’s been a completely befuddling situation, because if you look at the US gasoline demand, it’s actually fallen off a cliff. 

It almost suggests recessionary-like conditions even though we’re actually doing relatively well. Drivers in the US have really curbed their driving significantly, so that would really connote lower oil prices, but in fact, oil has been doing nothing but going up, and is actually now above $100 a barrel.

Record highs for this time of the year.

Clearly, I think that signals a tremendous amount of worry in the market over the Iranian situation. There’s a lot of fear that despite the fact that we have the election cycle in the US, there may be tension in the Middle East. 

Israel may actually finally threaten to bomb Iran, and that creates possibly a spike to $100 a barrel. So for all those reasons, oil is becoming a very important factor—geopolitically, but also economically—because the longer these prices remain at these levels, and the closer we get to $4 a gallon, that is the one single aspect of economic data that could snuff out the nation’s economy. Basically, it is the single biggest cost factor to the average daily consumer.

The closer we get to $4 a gallon, I think the more threatening that becomes to a sustainable recovery in the US.

Yeah, and CPI is always ex-oil and ex-food, which doesn’t seem to make much sense.

Since oil is governing, and a lot of the argument has been that sub-$100 oil has been where the consumer needs it. Yet it isn’t affecting the industry too much. There’s a weird balance of power there, correct?

It is, and I think the key is there’s the $100 a barrel-of-oil price that we see on the wholesale side, but really the important number is the retail number, which is the $4 gasoline, because at that level, the US consumer begins to really pare back his spending. It becomes a lot of substitutional spending for a wide swath of the US population.

And in that case, it acts as a major tax effectively on the US economy. It spoils the whole recovery, so it’s very important to see those prices begin to ease, because if they remain at these levels for a sustainable period of time, I think that is the single greatest threat to the US recovery.

Now it seems like Iran wants to try to pull the dollar peg off of oil and look for other customers that don’t necessarily pay that way. I know China is look at issuing bonds where they can create their own sort of separate currency.

You mean to do trade with Iraq?

Right.

I think all those are minor factors, because ultimately Saudi Arabia prices its oil in dollars, and that’s really the only thing that matters when you look forward. And really, it doesn’t even matter. 

Even if you were to price it in euros, it’s still the exchange rate that matters. The euro-dollar exchange rate is free-floating, so the value of oil is going to go up relative to the whether it’s quoted in dollars or euros, so I think that’s a red herring.

The bigger issue is why is there such a massive discrepancy between demand on one side and the actual price of the physical on the other? And that is because of the speculative element; the geopolitical threat that is embedded in the price right now.

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