Real Oil Price Contracts for Third Month

In real dollars, the price of oil averaged $94.69 in January 2013. This was 7.0% lower than the price of oil in January 2012. The month-over-month price of oil has contracted seven of the last 10 months. Annually, the price of oil has contracted faster each of the last three months. That trend will likely continue for a couple of months.

Because the U.S. still consumes a significant portion of the world’s oil, real consumer spending in the U.S. is a relatively good leading indicator of the price of oil. This is because producing and transporting all of those goods requires a lot of oil. Throughout 2011 and early 2012, the annual rate of growth in consumer spending had been decelerating. But, month-over-month growth in consumer spending accelerated significantly in the last two months of 2012. We may be on the verge of accelerating growth in consumer spending, which would push the price of oil higher. However, recent news from Walmart and other retailers has not been good. After consumers received their first paychecks of 2013 and noticed the increased tax hit, they dramatically pulled back their spending. The direction of consumer spending in 2013 will likely tell us whether oil prices will continue to contract faster or bottom out and contract more slowly in 2013.

Of course, the price of oil is a very good leading indicator for the production of oil, gas field and mining machinery.