$83 oil shifts from economic bright spot to villain

Crude has jumped $33.76 or 69.58% this year

In recent years, when oil prices increased, it was generally signaling good things about the U.S. and global economy. 

However, with oil crossing the $83-per-barrel level Monday, the winds have shifted to inflation woes and supply chain disruptions. 

ARE STAGFLATION FEARS OVERBLOWN?

Ticker Security Last Change Change %
USO UNITED STATES OIL FUND L.P. 49.66 +1.65 +3.44%

When oil joined the so-called "risk-on trade" and rallied, it would at times carry the stock market higher. Increased oil demand was a sign of economic activity, and because of the U.S. shale revolution, the rising prices of oil became a net positive as opposed to a net negative to the U.S. economy. America was not only a consumer of oil but a major producer; it helped boost our gross domestic product and allowed U.S. producers to produce more oil and keep inflation in check. 

IMF LOWERS GLOBAL ECONOMIC OUTLOOK, WARNS ON INFLATION

Yet those days might be over as inflation fears are rising as energy supplies are being held back around the globe. We got a fresh warning last week about growth prospects and inflation warnings from the International Monetary Fund (IMF) and the New York Federal Reserve

Ticker Security Last Change Change %
SP500 S&P 500 4578.2 +39.77 +0.88%

The situation is getting so worrisome that it is changing the complexion of the way the oil price is being viewed. Now the market is dreading higher oil prices, and instead of basking in the "risk-on" trade, it is even bringing back talk about '70s-style stagflation. 

Back in the '70s, oil going up was never good news. The rising cost of oil would kill our economy and helped create a new economic syndrome called "stagflation" defined by rising costs and slower economic growth. 

The reason for stagflation in large part was due to high oil prices and our dependence on foreign oil. The U.S. was held hostage to energy prices that were in large part dictated by the OPEC cartel. Oil price spikes in the '70s were the major factor in inflation and inflation expectations. Price spikes time and time again drove us into recession. 

Yet that problem of economic oil risk was solved in large part by the U.S. shale producer. Oil was less panicky when geopolitical risk threatened supply. It helped thwart prices spikes that would stun the economy. Shale oil may be the reason that despite strong economic growth, inflation stayed lower, allowing more sustained economic growth.  

Yet now, with the global push away from fossil fuel investment and the Biden administration putting more restrictions on U.S. energy, U.S. oil and global production are not rising with the increase in demand. Insufficient capital spending and an OPEC cartel that is stingy with output in conjunction with rash decisions by Europe to get off fossil fuels are creating an oil price shock risk that could stagnate growth and cause inflation.

So now, when the oil price increases, it could hurt stock prices and become a risk-off situation.  A sharp drop in stocks could hurt confidence and slow growth while oil prices remain high due to tight supply. That is the type of situation that could give you inflation with stagnated growth. 

Unless governments around the globe reconfigure the carbon policies, the oil price threat will weigh on the economy. Besides, we all know that central banks just can’t print more oil like they do money.  

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Phil Flynn is senior energy analyst at The PRICE Futures Group and a FOX Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.