Attack Of The $80 Oil…

David Kotok, Cumberland Advisors: The $80 oil price is starting to worry me a little. Translate it into gasoline and you get somewhere around $2.50 per gallon or a little higher, depending on where in the US you fill up your tank. Add to that a little cold weather and expanding crack spreads in refineries, and the price will edge toward $3.

History-derived economic models show that the US consumer starts to change behaviour as the price of gas approaches $3, and then goes into a more pronounced state of shock when it ranges higher, in the $3 to $4 corridor. The reaction is to cut spending and retrench if the consumer thinks the price is going to stay at the new higher level for a while. When the consumer thinks the price will not stay higher, he keeps on spending and buying on credit.


That history is derived, and has been modelled, from a time period when household balance sheets were relatively solid and when credit was flowing easily and when the unemployment rate was close to 5%, not 10%. So that is why I am starting to worry.

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