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Schork Oil Outlook: Not Quite Your Father’s ’70s Show

Monday, 15 Aug 2011 | 12:09 PM ET

Welcome Back, Carter

Confidence amongst consumers in the U.S. plunged in August to the lowest level since the dying days of the Carter Administration. The University of Michigan’s preliminary indexof consumer sentiment dropped by nearly 9 points, or 14% to 54.9.

That is the lowest reading since May 1980 and the third lowest since the indicator was first published in 1978. The reading for August was 35.2 points below the long run, non-recession average of 90.1. More to the point, despite an attempt by the IEA to manipulate summer gasoline prices in June, the index has dropped 19.4 points since May.

To this effect, the Index of Consumer Expectations, a subset of the entire University of Michigan survey, and a good indicator of potential consumer spending six months out, fell to the lowest low, 45.7, since March 1980.

The other easy comparisons between now and the late 1970s/early 1980s is the price of fuel and jobs. For instance, retail gasoline is averaging around $3.65 a gallon this summer. Adjusted for inflation, that is more-or-less what consumers were paying when Iraq invaded Iran in September 1980. On the employment front, the current labor force participation rate, 63.9%, is at the lowest low since May 1983 and the employment-to-population ratio, 58.1%, is now at the lowest point since July 1983.

Of course, the biggest difference between now and then are interest rates. For example, in the third quarter 1981, 30-year conventional mortgage rates averaged 17.73%! Today, a 30-year conventional mortgage will cost you around 4.55%.

Meanwhile, the Fed just promised to keep short-term interest rates at near zero for at least the next two years because, as the FOMC stated, “… downside risks to the economic outlook have increased”.

As noted in last Thursday’s issue of The Schork Report, the Fed’s decision is intuitively bearish for the U.S. dollar. That means, U.S. central bankers, despite their concern regarding economic growth, likely just set into motion (by virtue of the inverse relationship between the dollar and oil prices) the next rally in crude oil prices.

Bottom line, it might be cheaper today to fund a home purchase than it was 30 years ago, but the cost to heat/cool that home is high and poised to go much higher.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.

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