Déjà vu. $4.00 gas ($1.40/litre in Canada) looms on the horizon

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

If you love roller coasters, 2011 is certainly setting itself up for a wild ride stemming from commodity price volatility.  Events in the Middle East, the US Federal Reserve's quantitative easing and globally low interest rates are providing an unstable combination of market volatility triggers.  Of note recently is the upward march of oil with Brent now trading above $105 USD.  Predictions from the markets of a 10% price increase in gasoline for the summer are given a 1:3 and prices of $4.00 at 1:10 (in California it may be occurring as this blog appears).  For those folks that drive to work and for those firms that have energy as one of their main cost drivers how do you plan cope – what is your risk management strategy to retain as much of your income as possible and thus keep cost down?  One analyst has noted that between $3.00 and $4.00/gallon "real pain" hits the US consumer. What is your company's tolerance?

 

For a read of the original Fortune article follow the link:

http://tinyurl.com/6zq7xm9

 

The (Forgetful) Dismal Scientists or “Yesterday’s logic is illogical today”

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com

 

As the US Federal Reserve Chairman’s own version of the QE2 sets sail, commodity prices continue their upward move. The upward march in oil was initially caused by the increase in demand for product as world oil consumption moved from about 88 million barrels/day last year towards an expected 90 million this year. More recently, Brent crude has been pushed above $100 because of increased uncertainty of continued delivery from the Middle East.

Now those of us with long memories, say 12 months, will recall that the dismal scientists as economists are affectionately (?) known, predicting that the next recession would start when oil trades above $100 USD/bbl. Interestingly, the Street has not renewed their talking of this outcome but rather they focus on the renewed and continued strength of the US economy. It is strange that all the arguments Street economist gave about the effects of triple digit oil and $4.00/gallon gasoline 12 short months ago are no longer gain attention.

This blog raises 2 points:

1. It takes a paradigm shift for yesterday’s logic to be illogical or have reduced impact. Effective risk management must be dynamic but not at the expenses of forgetting the past.

1. It looks like price volatility will continue in 2011 and downside risk is starting to appear.For corporate risk managers: what are you doing now that the likelihood of downside economic risk is increasing or are you seeking safety in the crowd?

In fairness.  I caught the following (taken from the Globe and Mail) just prior to posting:

"The International Energy Agency’s (IEA) executive director Nobuo Tanaka said prices above $100 per barrel for the rest of the year could drag the global economy back into a repeat of the 2008 economic crisis."