Oil prices have spiked in recent days. Some are concerned that these higher oil prices will hurt the consumer. I'm not so sure I agree. Oil prices have been "higher" for quite some time now and the consumer has continued to spend. I think the bigger influence on consumer spending is unemployment.
With the economy slowing down, however, Jeff and I do think we'll get some better buying opportunities in the economically sensitive sectors of the economy, including materials, energy, and other commodities. The incremental buyer in commodity markets typically has a major influence on price. With the U.S. economy softening, we can't help but believe that a new, lower price level for many commodities might ultimately be set. While I understand the case for global growth, the U.S. is still a major determinant of demand.
Incidentally, this may be one reason why Bernanke isn't as worried about inflation -- for the first time since he's been in office. As incremental buyers decline for many commodities, the headline inflation numbers may finally start to converge towards the more tame "core" inflation readings.
I suspect that increased oil prices and market volatility in recent days has more to do with heightened geopolitical risks than the fundamentals of supply and demand. I don't know how many of you have seen Ken Burn's series on PBS titled "The War" in recent weeks, but it definitely reminded me of how "evil" mankind can be and how tense diplomatic relationships can become. When Mahmoud Ahmadinejad visited Columbia University about a month ago, the thought crossed my mind that it would only take one "lunatic" to launch World War III with an attempt on his life.
Vladimir Putin of Russia visits Iran today to discuss their nuclear development efforts. As oil prices have soared, perhaps Putin has some of the old "Cold War" step back in his stride, as Ed Yardeni has suggested. Then again, maybe he's just acting like a good capitalist, always looking for a new business opportunity. Where did he learn that?
Usually, all of this makes for the stuff of a great spy novel. If the paranoia level is high enough, however, it only takes a small spark to become very real. For now, one thing is for sure. Oil is certainly being entertained.