The Dow-Jones today topped the 13,000 mark for the first time since 2008. That is a fact. How, then, can I possibly be predicting a recession starting in a little over a week? The stock market is one of the worst indicators of the future. On March 9, 1929 the Dow Jones average was 381.70 but by the end of October in 1929 it had fallen to 198.69. The market lost 48% of its total value, most of that happening in October 1929. President Hoover looked at the economy he presided over in March 1929 and said that the warnings of upcoming trouble were worthless.
People are going to look at today’s stock closing optimistically. But they need to look at a single indicator that directly feeds into imminent economic trouble. Crude oil prices have risen over 30% since September 2011 and show no signs of retreating. To the contrary, they show every sign of rising to historic levels. The average person thinks of such a rise only with regard to what they pay for gasoline at the pump. But all forms of transportation are equally affected. This means the price of food, durable goods, clothing, and everything else goes up as well if only because they too have to be transported and that cost is reflected in the price of the item being sold.
But have you ever considered how much of everything in your life is petroleum-based? Consider that everything that is made from plastic is petroleum-based. That alone should give one pause to consider what rising crude prices mean. Petroleum is also used in medicines, clothing, and construction.
I believe crude oil prices are going to keep going up because of the continued unrest in the middle east. Lybia, Egypt, Syria, Iran, and Iraq are all in a more or less unstable condition. And all are oil-producing countries. Adding to this unrest are both Afghanistan and Pakistan, neither oil producers, but both home to radical Islamists who have every intention of continuing or raising the level of unrest in all the countries mentioned.
In today’s world economy energy drives those economies. Whatever is happening to the price and distribution of oil affects all economies to one degree or another. It is like throwing a rock in the middle of a calm pond. The waves that rock creates moves outward in all directions, and the bigger the rock, the bigger the waves. Right now we are feeling the waves of uncertainty in the market. Consider that most countries in the world produce no oil at all, and two that do, the United States and China, both in the top 20 oil producers, export none of the oil they produce and import even more. China will benefit from Iran’s decision to stop sending oil to England but of course England will suffer. And so the rock Iran threw in England’s water will send its waves throughout Europe.
The unrest in the middle east is unlikely to settle down any time soon. That means the market jitters are likely to continue as well. That of course means oil prices will remain high with a high likelihood of their going ever higher. I think it likely that the average price per gallon of gasoline will be at or close to $5 by summer’s end. People will, of course, cut back on their purchases and with that the economy takes a hit, probably a big on.