Marketplace Scratch Pad

Triple letters and triple digits

Scott Jagow Oct 22, 2009

Some analysts say, without a doubt, the price of oil is headed for $100 a barrel. It hit $82 today, and the conditions are ripe for more gains. Down the road there’s another issue. What happens if the US loses its AAA credit rating, and the dollar is fed (pun intended) into the shredder?

Today, Moody’s lead analyst Steven Hess appeared on Reuters TV and declared that yes, the US is danger of losing its top rating:

“The AAA rating of the U.S. is not guaranteed. “So if they don’t get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy.”

Hess said that reducing the budget deficit would be a challenge.

“Raising taxes is never popular and difficult politically so we have to see if the government can do that or cut expenditure,” he said while adding it would be tough to reduce expenditure.

Yes, it is difficult when the government doesn’t want to do it. Still, there really wasn’t a need for Moody’s to make this declaration today. A kindergartner can figure out the US needs to attack its deficit or face the consequences.

But since Moody’s brought it up, what would it mean if the US lost its AAA rating? From Daily Finance:

We’re already seeing a move away from the dollar, so if Moody’s were to carry out this threat, that movement would turn into an avalanche. That’s not a big problem if the only products you buy are made in the U.S. with raw materials from the U.S., but any imported items would become dramatically more expensive. Of course, it’s hard to find entirely U.S.-made products.

And an avalanche away from the dollar, of course, means higher oil prices. With the recent weakening of the dollar, we’re already seeing oil creep up. The Fed’s resistance to raising interest rates doesn’t help either. From Minyanville:

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.”

Higher gas prices are coming, too. The past week, the national average shot up 8 cents to $2.57. Still, the fundamentals don’t support oil at $100 or even at $80. From the LA Times:

“We still have an oil glut. We still have weak demand. More than half of the recent increase in oil is speculation and not supply-and-demand fundamentals,” (energy analyst Fadel) Gheit said. “People are brushing aside everything we learned last year from the collapse of the economy…”

Seems to be a common theme lately.

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