Higher oil prices, weak dollar could kill the US economy

11 October 2010 11 October 2010

BonTrade

Higher crude oil prices, a weak US dollar and unemployment numbers could be a recipe that kills the US economic recovery later this year and into 2011.

It’s All About the US Dollar

The US Fed’s money printing plans haven’t worked so far, so why are they continuing to take the strategy of more money printing? Total US debt is now over way over $13 trillion and the latest moves by the Fed will see these figures rising fast. US GDP is at $14.6 trillion (Q1 2010) and US debt is now at 89% of GDP, up from 51% in 1988.

US dollars, and dollar denominated Treasury Securities, are becoming less desirable, so their value declines. As the dollar declines, foreign holders get paid back in currency that is worth less, which further decreases demand.

It really is all about the US dollar. The dollar is the currency that commodities are traded in and as far as we can tell, this isn’t about to change soon. As the dollar slides lower, commodities including the stars, oil and gold rise ever higher.

The ICE Dollar Index hit it’s lowest level in July 2008, trading in the 73 range. Currently, the ICE Dollar Index is in the 77 range and today is down 0.2 per cent at 77.08.

Meanwhile, US unemployment is putting severe stress on state unemployment funds as at least 25 state unemployment funds have gone broke and the Department of Labor estimates that 15 more state unemployment funds will likely go broke within two years and will need massive loans from the Fed just to keep going.

High Oil Prices are Menace of the US Economy

The US is the world’s biggest consumer of oil, by a very long way. Ask yourself a question, of the US dollar halved in value over the next year, and oil supply remains tight, what will be the price of oil in 2011 and how much would gas cost at pumps across the US?

If this gloomy senario came around, our guess is that oil prices would be way up near record highs of the 2008 $147 mark. These sort of prices for oil would bring back $4 US gas prices and higher, something that the US economy cannot afford right now.

Remember this? “Light, sweet crude for August delivery soared to an all time high of $147.27 a barrel before settling at $145.08, up $3.43″ – Posted on 11th July 2008.

Oil Price Forecast for 2011

At the end of July this year JPMorgan Chase made it’s oil price forecast for WTI oil futures in 2011 at only $79.25 a barrel from an earlier estimate of $90 a barrel. Maybe they should have stayed with the $90 figure. Further to this and in the same email report, JPMorgan cut it’s forecast for oil prices in 2010 to $77.25 a barrel for WTI crude from a forecast of $81.75 a barrel made in June.

Of course, these are only estimates, guessing the future price of anything, let alone oil prices is difficult at best. But with current oil prices at $82 a barrel, and the prospect of another big leg down for the US dollar, it’s easy to see that oil prices could trade higher, much higher, soon.