Another Oil Shock

How bad is a one day $11 dollar jump in oil prices? In concert with some bad job news from the government, enough to cause the Dow to drop 400 points, wiping out trillions of dollars in wealth. Friday's oil surge was the greatest in the history of the New York Mercantile Exchange.The next question is why did oil take this sudden leap?

Earlier this week, Fed Chairman Ben Bernanke took the unusual step of signaling the Fed's desire to staunch the dollar's decline. When the Central Bank in concert with Treasury starts talking up the dollar that's usually a good sign that it will rise as indeed it has. This would ordinarly suggest easing oil prices but instead we got the reverse.

Did supplies tighten enough to drive a one day 8% rise in the commodity's price? No, not literally. The immediate cause of the spike was a Morgan Stanely report by an analyst arguing that supplies are tight enough that oil prices may go up to $150. But normally one report does not drive a record spike. Indeed, there has never been a spike like that on Friday. The sharp jump may be evidence that computer trading by hedge funds is driving extreme volatility. But it clearly testifies to just how jittery the market is as demand in Asia soars and supplies stay pat. The fact is this sort of volatility is likely to continue.

Longer term, oil prices at this level threaten huge changes in our economy. At NDN we have begun thinking about the long term consequences of sky high oil. SUV sales are said to be down 30%, GM is threatening to put its Hummer brand on the block and home sales in the energy dependent southwestern exurbs have plummeted.

At prices like these, the old America is rapidly receding.