Last week, while the stock market was experiencing significant fluctuations, an important event went largely unnoticed: oil prices surged beyond $100 per barrel. Year-to-date, oil prices have risen by approximately 5 percent.
“Oil futures experienced a notable rally on Friday, gaining nearly 3 percent for the week after briefly surpassing $100 per barrel shortly before the trading session closed on the New York Mercantile Exchange,” reported MarketWatch.
Phil Flynn, a senior market analyst at Price Futures Group, referred to this as “a risk-on rally.” This term implies that investors are more willing to take risks. Flynn suggests that rising oil prices indicate a bullish outlook among investors.
However, it’s unclear how Flynn arrived at this conclusion. While labeling it a “risk-on rally” may sound insightful, we perceive various potential risks looming on the horizon.
For instance, today marks the first testimony of new Fed Chair Janet Yellen before the House of Representatives. On Thursday, she will also address the Senate. The stock market will undoubtedly keep a close eye on her performance, ready to react depending on how well she delivers.
Economic Distortions
In addition to Yellen’s prime-time appearance, there’s the pressing concern of sluggish job growth. The Labor Department reported that only 113,000 jobs were added in January, following a mere 75,000 in December.
This raises an obvious question: If the economy is on the mend, shouldn’t job creation be stronger? Intuitively, the answer seems to be yes; however, in reality, it’s not that straightforward.
When it comes to the economy, clarity is often elusive, particularly when extreme monetary policies cloud financial markets and their broader impacts. In essence, things are rarely as they appear.
As Henry Hazlitt noted in Economics in One Lesson, “the art of economics lies in examining not just the immediate effects of any act or policy, but the long-term consequences for all stakeholders involved.”
Factors such as job creation, consumer spending, manufacturing output, and price inflation are all influenced by the Fed’s actions in various ways. This complicates the process of drawing logical conclusions based solely on reported data.
While it’s conceivable for the economy to improve without significant job creation, we remain cautious about disregarding Friday’s employment report as devoid of risk.
Ventures Into Sophism
Currently, our focus is less on determining why oil prices have risen, and more on understanding the potential impact on the economy. It is generally logical to conclude that, at some point, escalating oil prices will hinder growth.
Increased oil and gas prices serve as a financial burden on consumers. Essentially, these rising costs divert funds from disposable income to necessary expenses. Money that might have been spent on discretionary items, like a new pair of shoes, is instead consumed by driving costs.
Consumer spending constitutes around 70 percent of the economy. A decrease in available funds for consumers can negatively affect GDP, leading to fewer job opportunities and sluggish economic growth. Thus, the concerns regarding higher oil prices are well-founded.
That said, you can easily find economists who assert that rising oil prices indicate growing demand and a robust economy. These conflicting interpretations highlight the often ambiguous nature of economic analysis.
Trying to establish the causes behind short-term price fluctuations can veer into the realm of sophistry. Any explanation, regardless of its validity, can be concocted to justify price movements. For all we know, last Friday’s spike in oil prices might be attributed to something as mundane as weather conditions—rather than a “risk-on rally.”
Curiously, an arctic cold front currently sweeping through Austin could have played a role.
Sincerely,
MN Gordon
for Economic Prism
