Skip navigation

Tag Archives: Gas Prices

Most forecasters try to be middle of the road, but try to cushion the downside, and ‘enhance’ the upside. The scenario below could become a reality and could lead to an extended recession well into 2011.

1. The raw data suggests that pump prices triggered the house price collapse. The logical cause and effect would be spiking gas prices eliminated many peoples’ discretionary incomes.

2. This reduction in discretionary income rippled throughout the economy as a reduction in consumer spending, a finite budget showing up as reduced demand for goods and services.

3. Therefore, the housing collapse, the mortgage mess, and the banking crisis. But would not have been as severe as it is now if the sub-prime mess was not waiting in the wings.

4. If the Fed/FDIC has underestimated the severity of the banking crisis as Nouriel Roubini  has suggested, we are going to see more bank failures, and further tightening of credit. This may be the case if their methodology addressed mean loss rather than percentile loss (eg CVaR). I’ll research the methodology and will let you know what I think. But don’t get me wrong, I have great respect of Bernake, Bair and Geithner.

5. My crude estimate is that $2.00/gallon is the threshold price for point of inflexion between +ve and –ve economic growth. Gas prices at the pump have exceeded $2.00/gallon. If I am correct we are going to see further slowdown and more job losses.

Therefore, this crude analysis suggests that the Fed/FDIC/forecasters have underestimated this recession severity in the presence of oil price increases, and just may be our recession will last well into 2011.

Benjamin T Solomon
Managing Principal
QuantumRisk LLC

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.

My neighborhood’s cheapest gas price at the pump, jumped from $1.66 about 10 days ago to $1.82 today. That is too close to the $2.00 mark.  

My earlier analysis showed that the US economy slows down if pump prices exceeds $2.00 a gallon. So don’t expect an early recovery, this year. At this rate we are looking at a recovery in 2010 at earliest.

Here, Oil prices slump below $44 on inventory report, we have confirmation that consumers are conserving cash for really important things like potentially expensive commutes to work and back, for those who still have jobs. That has caused reductions in consumption purchases and resulting reduction of trucking of goods.