As Hurricane Katrina blows through the Gulf of Mexico Monday, disrupting critical U. S. oil exploration and refining operations and prompting evacuations along the Gulf Coast, oil futures have jumped to new highs, trading over $70. for the first time, according to The Associated Press. This tops off weeks of oil prices edging higher, with sticker shock at the pump now an everyday occurrence. But what do oil prices at record levels mean for the economy and your clients?
“I’m mostly worried that higher oil prices will eventually start to crimp economic activity. I’m much less concerned than the Fed about the potential inflationary impact and more concerned about the economic impact at this level, ” says Kathleen M. Camilli, president of New York-based Camilli Economics, LLC. “ Wal-Mart has sounded the siren that at this level of oil prices, their lower income consumers are starting to be affected.”
Camilli thinks that the Fed should keep rates where they are for now, at 3.5% for the Fed Funds rate, until they “see what the negative ramifications are,” of the price of oil, how much higher it goes and what it may do to the economy. Inflation is not a factor at this point because Camilli sees deflation in inexpensive goods imported from China and India. There is “tremendous uncertainty about what level [of oil price] was important,” according to Camilli. “I don’t think there’s much agreement at all within the economic community about what level [of oil pricing] would have a dampening impact.”
What can advisors do to help hedge the effect of oil prices for their clients? “Many have had a commodities allocation for the past two years,” and have had the benefit of oil stocks rising. She says it’s not too late to allocate some part of the portfolio, selectively, to energy.