Oil May Trump Credit Crisis In Undermining US Economy

Most of the business and economic headlines splashed across the media are related to fears that the credit crisis will further erode the default rate on mortgages and drive more huge losses at US financial firms The write-downs at banks and brokerages, which already total $180 billion, are eye-popping.

Morgan Stanley recently wrote that subprime losses could cause a total of $325 billion in margin calls at already-troubled banks. Since that capital is not likely to be made up by private money or capital from abroad, the Fed, which has already offered the systems $100 billion in liquidity, may have to double or triple that amount.

The financial and real estate businesses are probably cannot be save from deep recessions within their sectors of the broader economy, but that does not mean that other parts of the system cannot be fire-walled and supported. The package the government is putting into place should put several hundreds dollars in tax rebates into the hands of most Americans. That may well spike consumer spending up and prime the pump for a resuscitation of the buying habits that pushed GDP up for several years.

In the background, the price of oil has moved to $106 and may go higher. The dynamics of consumption in Asia and flat supply out of OPEC mean that oil may not come down. Goldman Sachs analysts wrote that the price of crude could spike above $150 to $200.

The Associated Press recently asks and answered "What happens as gasoline prices in particular increase? The fear is that Americans, forced to pay more money for gasoline and overwhelmed by other economic issues, will continue to hunker down".

That means that there may be a second "recession" is the offing, one that pushes beyond the financial and housing crisis and threatens a number of other large industries which have a large portion of their costs or their customers costs tied up in the price of gasoline. First among these are airlines, auto companies, and retailers. Beyond the obvious, petroleum is used in the manufacture of a number of other products like plastics and other petro-chemical based components.

To make a case which is more to the point, $4 gasoline could easily eat up a tax rebate of several hundreds dollars, especially for people who drive a car.

Douglas A. McIntyre