Everyone’s trying to quantify the impact of oil price spikes on the economy.
Here’s a stab at the impact on corporate earnings from JPM’s Thomas Lee:
We decided to analyse the impact on S&P 500 EPS from a 2-standard deviation rise in oil. For our purposes, we simply took the change in bottom-up S&P 500 estimates and compared them from the point where oil crossed 2 std deviations above the trend vs. estimates 6-months later. We prefer a 6-month look ahead, rather than 3-month, (i) given transmission delays in higher oil prices, (ii) to reflect cumulative risks to economic outlook from the surge, and (iii) it is more pertinent today as we are still 10 months from the end of 2011.
• A scatter plot of the historical episodes against changes in S&P 500 EPS is shown below in Figure 3. As shown, the greater the surge in oil prices, the greater the cumulative impact on S&P 500 EPS has beengenerally.
• Using the slope from Figure 4, each 10% rise in oil is 1% impact to EPS. The most notable effect, not surprisingly, occurred after the major surge in oil in 2008;