Preview of market action
>> welcome back, everyone, to the special edition of television. i’m carol massar in new york. picking. our discussion, talking about the economy and corporate spending. we’ve heard from a lot of corporate executives about the impact oil specifically is having on the economy. john chambers of cisco said it last week. how much are you concerned or how worried are you about oil in terms of where it goes over the next few month?
>> i think right now there certainly is a risk premium priced into the oil, meaning the current level is not what the current supply and demand dictate. the problem is, as we go out, there’s not a lot of supply coming online or that supply is unreliable. it’s harder to get out. the quality of the oil being pumped now is lower, meaning higher sulfur, more difficult to process. we don’t have enough refining capacity in the u.s. to even process the incremental oil that’s coming out of the ground. so we’ll find ourselves in very much a supply-demand imbalance. prices will stay high, and go higher. we think in general the market is really pricing in $25, $26 oil into the price of oil shares but we think oil will be sustained at $30 30 to $35 going forward. the current price won’t last but $30 to $35 is a floor.
>> mike, do you expect oil to stay at these levels?
>> i wouldn’t be surprised that over the long haul we stay at these levels or higher. it’s still relatively inexpensive compared to where it was in the 1980’s on an inflation-adjusted basis and our use of oil is less per unit output so we think at the end of the day, i’ve seen estimates that this has taken about $600 a year out of consumers’ pockets for filling up their gas tanks more on average and that hurts folks dependent on the consumer at the margin, like wal-mart. you saw weakness in retail. we expect to see that continue. on the other hand, it’s simply a bubble, a one-time bubble that will work its way through the economy over time and as long as we stabilize here, we’ll find other ways to power things.
>> i actually think we might see a hit in the coming months. we were talking to our fuel company the other day, heating oil is 50 cents a gallon more than it was last year. you use a couple of thousand gallons, that’s a thousand dollars from your pocket. that’s an impact.
>> it is a drag on the consumer but it’s most pronounced on the lower end, the lower half. and you see that in the retail results and things like that. the other thing that you addressed earlier as a measure of risk, and that is a concern. because it is a measure of the risk aversion in the market , that you can look on both sides. if it comes down, that. help the market and suggest better things ahead for the market if it did come down.
>> i want to bring the chart into the discussion, a chart of crude oil versus g.d.p. the white line is oil and g.d.p. growth is the orange line. if you go back to the 1970’s, every recession has been preceded by a spike in oil prices and we see a spike there, the white line, and how economic growth has fallen off. are you concerned at all at this point that we could see the economy fall into recession because of the higher energy prices, pret?
>> at the current level, i don’t think it’s enough to take us into recession. as mike said earlier, we’re not as dependent. the economy itself does not use as much oil per unit of production as it did in the past. the real demand drivers right now are coming from the emerging markets of the world―china has become the second largest user of oil in the world, passing japan. 40% of the demand growth over the last five years came from china. so at the margin, much of the demand will be how fast china is growing, not necessarily how fast the u.s. is growing. at current levels, though, it’s not muff to take us into .
