Research Excerpts

Crude Oil and the US Economy: Production, Prices & Predictions

Posted on: Friday, February 24th, 2012

The key focus of both the press and the US financial markets this week has been rising oil prices as commentators attempt to identify why crude oil prices have spiked to $109 per barrel as of this morning, and speculate on high oil prices’ implications for an emerging US economic recovery.

Here are a some interesting charts and data that address these issues.

1)  US oil production has actually increased by 11% since 2008, following a 15% decrease between 2000 and 2008.  This chart suggest that a lack of production is not the reason for this month’s spike in oil prices.

2)  On February 19th, The Houston Chronicle stated that:

“The number of rigs in U.S. oil fields has more than quad­rupled in the past three years to 1,272, according to the Baker Hughes rig count. Including those in natural gas fields, the United States now has more rigs at work than the entire rest of the world.

These data help to explain why oil production has risen since 2008 as shown in the first chart, and suggest that this increase in production could continue, if not accelerate, in the years ahead.

3)  Finally, regarding the assertion by some that rising oil prices will killing the US economic recovery, the chart below suggests otherwise.  It plots NYMEX crude oil daily (red bars) alongside the S&P 500 (black bars), the latter which is often seen as a bellwether of US economic growth, since 2007.

The chart shows that these two series have maintained a tight and stable positive correlation to one another for almost 5 years — actually ever since the US stock market peaked in October 2007.  It indicates that, at least over the past 5 years, the US economy — as represented by the S&P 500 — has actually flourished when oil prices were rising and has weakened when US oil prices were declining.

This chart corroborates what Treasury Secretary Tim Geithner said this morning in an interview with CNBC’s Steve Liesman, stating that the current spike in oil prices is primarily attributable to 1) global economic growth and 2) geopolitical tensions coming out of Iran.

So, bottom line, as long as the relationship shown in the  chart above remains intact, recent history suggests that rising oil prices, at least from at or near their current level, are unlikely to put a damper on the recent rebound in the US economy.

Asbury Research subscribers can view our latest research and analysis on both crude oil prices and the energy sector, including our February 21st report entitled Crude Oil: Our $105.00 Target Has Been Met, by logging into our Research Center.