Reason to Worry?

Last week we focused on the housing market. We would be amiss in not bring up the energy markets as well, as the price of oil has been in the headlines this year. It is always interesting when looking at history and how modern times have changed. For example, last week we spoke about how — just over a decade ago — real estate led us into a devastating recession. Today, it has led us out of our recession.

Almost 50 years ago, the oil embargo caused oil prices to skyrocket, and it led to a major recession. This was followed by two other recessions which were preceded by spikes in oil prices. This year, the price of oil has again risen sharply. Should we be worried—or is this spike seen a transient as we have labeled inflation?

The truth is that today we have a lot of excess capacity with regard to world oil production. The problem is similar to other industries, production contracted sharply because the economy shut down so quickly last year. Now OPEC can’t decide how fast to open the spigots and even American shale oil producers are holding back and making sure the price increases will hold. Even though the spikes are real, this is not a capacity issue. Which means the problem will hopefully be temporary. Again, emphasis on the word HOPE.