Oil and Gas Today

Can two dissimilar economic indicators get along without driving each other crazy?

That’s the question for two key metrics these days – oil prices and inflation.

We could call them the Oscar and Felix of the economic landscape. At first glance, they don’t seem to have much in common.

Oil, after all, is a physical, geological asset that is drawn from the earth and used to fuel cars and heat homes (among many other attributes).

Inflation is more of an ethereal entity, almost ghostlike in its ability to hover around economies and frighten financial types.

Make no mistake, oil and inflation are as intertwined as any two contestants on Dancing With the Stars. That tight connection is beginning to assert itself now, and that could mean better days for the oil and gas industry – and soon at that.

Here’s the deal. Inflation can’t thrive in a low oil price environment. There’s a myriad of reasons for low energy prices. Chief among them is demand. Consumers, both in business and as individuals, will hunker down in tough times and wait for the sun to come back out before they reach for their wallets again.

How do you tell when the sun might shine again? For starters, look at the employment numbers. When unemployment is rising, as it was for most of 2008, people are scared for their jobs and won’t spend a lot of money on commodities like oil and gas. They’ll keep a closer eye on the home heating bills and will think twice about that trip to Disneyland. They’ll buy smaller cars and opt for public transportation to save on commuting costs.

That’s what most Americans have been doing - until now. Maybe you’ve heard of the term “green shoots” – meaning that leading economists are beginning to see signs of growth on the economic front. A lot of those shoots come from the job market, where it looks like unemployment finally might be in remission, albeit mildly.

Last Friday, the U.S. Bureau of Labor Statistics announced that the U.S, economy had lost 535,000 jobs – about 100,000 less than the experts had thought. Even more tellingly, the U.S. government revised the jobs numbers for February and March, noting they were lower than previously thought.

Fewer people are losing their jobs – and more people are feeling a little better about the economy. That influences demand, which in turn triggers higher prices for oil and gas, and with it, comes the specter of inflation (historically the price of a barrel of oil has been a remarkably accurate harbinger of inflation).

I think that’s what we’re seeing now. It’s no coincidence that both gasoline ($2.40 per gallon) and oil (over $56 per barrel) are seeing prices on the upswing over the last few weeks. Just as the jobs picture has brightened the trend is creating a more optimistic consumer confidence picture, as well.

How optimistic? The Conference Board Consumer Confidence Index, which had posted a slight increase in March, improved considerably in April. The Index now stands at 39.2, up from 26.9 in March. The “Present Situation” Index increased to 23.7 from 21.9 last month. The “Expectations Index” rose to 49.5 from 30.2 in March.

There’s clear indication that consumer demand is on the rise and with any luck, should continue to strengthen. Thus demand for oil and gas will rise, too, as people venture back out into the commercial sector. Already we’ve seen the price of a barrel of oil rise from the mid-$40’s in January to $56 today. And gasoline has risen from under $2 a gallon to $2.40 a gallon over the same time period.

If history is any guide, inflation should follow closely behind. If prices rise too much, expect the Federal Reserve to wade in and raise interest rates, and thus the cost of doing business.

For now, though, inflation is merely a looming threat. But higher energy prices are already here. That’s good news for the oil industry.