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What $100 Oil Means for the Economy


A triple-digit price will break the consumer.

The mainstream press still looks enthralled with the story of the alleged fraud at Galleon and the technically meaningless milestone of the Dow busting through 10,000.

But here at the 'Ville, we have a different question this morning that impacts a lot more Americans: When do we start paying attention, as investors, to the rising price of crude oil and what this means for companies and consumers across the country?

Oil futures, stuck in the $65-to-$75 range for around four months, flirted with $80 a barrel for the first time in a year this week, carried in large part by a weaker dollar.

Where does the black gold go from here?

From his perch, John Kilduff, senior vice president and energy analyst at MF Global, sees oil likely headed to $100 before the end of the year, on the back of a slumping greenback and strengthening demand in China.

"We see China purchasing over one million cars last month for the first time, a trend we expect to continue," Kilduff tells Minyanville. "Their crude oil imports continue to be at or near records, month in and month out."

He adds, "This all points to what the market is pricing in, and that's the structural issues we face as the global economy recovers and, especially, as these energy intensive economies recover."

Should oil hit $100, Kilduff says, gas prices sail to $3.25-$3.50.

Peter Boockvar, equity strategist at Miller Tabak, agrees that oil is headed for triple-digits.

"We have two things going for it," he says. "We have an improvement in global economic activity and we have extremely easy money, which is kerosene on the fire."

Boockvar adds, "We see no sign from the Fed that they are inclined to change their policy any time soon. And, even when they do, it means the economy is much better, which could also lift commodity prices. So, under multiple scenarios, prices go higher."

As for corporate America, the question, says Boockvar, is when that line is crossed and the price of oil starts to impact profit margins.

"For example, airline CEOs talk about how, if oil goes much higher from here, all bets are off with respect to their earnings," the strategist says. "The question is where that line is. Is it $80? Or gas at $3?"

But the more critical question is this: What do higher oil prices mean for your willingness to shell out money at the local mall, given that consumer spending makes up 70% of the US economy?

"A year ago, when oil was at $150 a barrel, we had a much richer consumer with a better portfolio, better outlook, and many more jobs," says Kilduff. "We just don't have that this time around."

The energy analyst concludes, "This is about the end of the road in terms of what the consumer can handle here, at around $80 a barrel. The consumer will be in process of bending before they break, which is when crude is upwards of $95."

Already, investment pros are saying we can expect a jump at the pump.

So writes Curt Hesler, longtime editor of the Professional Timing Service newsletter. He pointed out in a research note last night that gasoline futures have shot up from about $1.62 to $2.00 over the last four weeks.

"Just when the consumer was feeling a bit better with the stock market rally and all, energy prices move higher just in time for winter," Hesler writes. "As fuel prices play catch up with crude oil, you will begin to notice the price of other necessities rising as well."

As for investment implications, Boockvar says rising energy prices should encourage stock pickers to reconsider some of their bets.

For instance, investors have moved hard into the retailers. The SPDR S&P Retail (XRT), an exchange-traded fund that includes holdings like Expedia (EXPE), Guess (GES), Nordstrom (JWN), Tiffany (TIF), and Whole Foods (WFMI), is up 41% over the last six months.

Higher prices at the pump might lead investors to rethink whether this is the smartest sector to buy, says Boockvar.

"If you are buying retailers here then you are assuming that the consumer won't be bothered by paying higher gasoline prices," he says. "That is a game of chicken. We'll see how long that lasts."
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