Last week, while everyone was busy watching the stock market wildly convulse about, something noteworthy occurred. Oil prices eclipsed $100 per barrel. Moreover, oil prices are up about 5 percent so far this year.
“Oil futures rallied on Friday, tacking on nearly 3 percent for the week after briefly topping $100 a barrel shortly before the close of the trading session on the New York Mercantile Exchange,” reported MarketWatch.
Phil Flynn, senior market analyst at Price Futures Group, called it “a risk-on rally.” The trite term risk-on, if you don’t recall, means investors have a higher tolerance for risk. In other words, according to Flynn, rising oil prices are a sign investors are bullish.
Quite frankly, we’re not sure how Flynn came to this conclusion. But we suppose calling it a “risk-on rally” made him feel smart. Nonetheless, from our vantage point we see plenty of risks appearing on the horizon to be weary of.
For instance, today, new Fed Chair Janet Yellen delivers her first testimony to the House of Representatives. On Thursday, she’ll follow it up with some words for the Senate. Without a doubt, the stock market will watching intently and will quickly decide if she botches it or not.
Economic Distortions
In addition to Yellen’s move to primetime, there’s also the risk of flailing jobs growth. According to the Labor Department, only 113,000 jobs were created in January. This followed just 75,000 new jobs in December.
What gives? If the economy was improving, and things were getting better, wouldn’t more jobs have been created? Intuitively, the answer is yes. In practice, the answer is maybe…or maybe not.
For things are hardly intuitive when it comes to the economy. Especially when there’s extreme monetary policy clouding up financial markets and everything else that’s touched by financial markets. What we mean is nothing’s hardly what it seems.
“The art of economics,” wrote Henry Hazlitt in Economics in One Lesson, “consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Jobs, consumer spending, manufacturing, price inflation…you name it. These factors, and many others, have been distorted in one way or another by the Fed’s actions. That’s what makes drawing logical conclusions, based on what’s reported, so challenging.
Perhaps it is possible for the economy to improve while not producing new jobs. Certainly, stranger things have happened. Still, even if the stock market didn’t seem to think so, we’re not ready to write off Friday’s employment report as having no risk.
Ventures Into Sophism
At this point, our job is not so much to find out why oil prices went up. But, rather, it’s to attempt to understand how this may affect the economy. Relying on logic to make inferences and draw conclusions, it is generally obvious that rising oil prices will, at some point, prohibit growth.
Higher oil prices, and higher gas prices, act as a tax on consumers. In effect, higher gas prices subtract money from the consumer’s disposable income and transfer it to their expenses. Suddenly, money they thought they had to buy a new pair of shoes gets burned up and passed through the exhaust pipe of their motor vehicle.
Remember, consumer spending accounts for about 70 percent of the economy. If consumers have less money to spend, GDP will be negatively impacted. This, in turn, will lead to even fewer new jobs and a slow growth economy. These are logical conclusions for why higher oil prices are a concern.
Yet what do we know. Unquestionably, you won’t have to throw a stone very far to hit an economist who concludes that rising oil prices are a signal of increasing demand and an economy that’s heating up. These sorts of differing deductions are what make economics a pseudo-science.
Similarly, assigning causality to explain a short-term price fluctuation is a venture into the murky waters of sophism. Any reason can be invented to explain anything no matter if it is flawed or not. For all we know, oil prices went up last Friday because of the weather…not because of a “risk-on rally.”
Don’t you know? There’s an arctic cold front in Austin.
Sincerely,
MN Gordon
for Economic Prism
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