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Is Higher Oil a Threat to the Economy?

Oil prices are close to cracking $100 per barrel, but there's nothing to worry about.

Today U.S. Treasury Secretary, Timothy Geithner downplayed the potential negative blow of more expensive oil on the global and domestic economies. 'The economy is in a much stronger position to handle' rising oil prices, Geithner said in a Bloomberg Breakfast in Washington D.C.

Meanwhile, stocks closely linked to the energy sector like the Energy Sector SPDRs (NYSEArca: XLE), SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP) and the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEArca: OIL) are sharply higher.

As political turmoil sweeps across the Middle East, the perception that oil supplies could be interrupted or cut short swirls. This is especially true of Libya's civil unrest. Because it holds Africa's largest oil reserves, Libya is seen as having a much larger impact on oil prices than Egypt, Bahrain or Yemen.

For sure, higher oil prices won't be beneficial to the global economic recovery. It will only increase the cost of transporting people and goods.

Measuring National Misery

The buzz word right now in economic circles (minus Treasury Secretary Geithner's circles) is 'stagflation,' which describes an economic climate of high unemployment and inflation. The 1970s are often cited as the best example of stagflation's destructive forces.

Another way to analyze surging oil prices and inflation is with something contrived by economist Arthur Okun.

He created the misery index in order to simultaneously measure the effect of joblessness and rising consumer prices. The misery index is calculated by adding the unemployment rate to the inflation rate. A high reading would indicate worsening economic conditions while a lower rate would indicate a more favorable environment.

How does the misery index look today?

Over the last 12 months, the government's inflation gauge, the Consumer Price Index ( CPI ) increased 1.6 percent before seasonal adjustments while the headline nationwide unemployment rate (U-3) is at 9.0 percent. Adding the two figures together gives our misery index a current reading of 10.6 percent. While that figure is hardly a record, the index hasn't been this high since the George H.W. Bush Presidential era from 1989-1992.

Again, it's doubtful the Treasury Secretary has ever heard about the misery index and if he has, he's certainly not saying.

Meanwhile, oil and gasoline prices continue to rise.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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