The Price of Oil: ?Mini Report Card? on U.S. Economy

In the modern era, and now the postmodern era, Americans are time-pressed. Most people don't have time to review the U.S. economic calendar -- what with work, family responsibilities and all.

Further, pouring over the latest, summarized economic research by the U.S. Federal Reserve is not exactly an exciting Saturday night for many, but you still want to stay plugged-in to the U.S. economy and its outlook.

How to do it? Use the oil price shorthand.

Oil: A Telling Barometer

The price of oil is a good, rough barometer for the U.S. economy. Don't misunderstand: it's not a perfect barometer, but it does provide a rough indicator of how the U.S. economy is faring, as well as the outlook for the world's largest economy.

Here's why:

Oil is the lifeblood of the U.S. economy, and, to a lesser extent, of the global economy. Oil is the world's most vital commodity. (That is, until some other plentiful, cheap, portable energy form comes along/is discovered to displace it.)

Therefore, start with a neutral price of $70 per barrel in 2011 dollars (current dollars). That's equal to about a $51 per barrel price for oil in 1999.

The $70 price is relatively high and it's a level that makes almost every oil exploration project -- save selected oil sands and other non-conventional oil projects -- profitable.

Now, for a variety of reasons, the price of oil can't stay above $70 per barrel if the U.S. economy slumps and/or if the global economy falls into a recession.

Conversely, oil's price is unlikely to drop below and remain below $70 per barrel for a sustained period (six months or longer), if the U.S. economy is growing at a healthy rate.

To be sure, there are exceptions to the above rules: if the U.S. experiences a period of high inflation, or if a sustained war breaks out in the Middle East, or if a major oil producer (Russia, Saudi Arabia, Iran, Venezuela, or Mexico) cuts off oil production to the U.S./world, oil's price would jump, and the GDP in the U.S./world would slump.

Two Handy Oil Charts

To monitor oil's price, check out IBT's commodities page, by clicking here.

Another good chart is at stockcharts.com.

Oil closed Monday down $1.86 to $91.93. The price quoted is West Texas Intermediate crude, and for a variety of reasons, it's lower than Brent Crude.

But use West Texas Intermediate: if the price is falling and continues to fall through $70, know that the institutional investors (IIs) -- the finance world's most knowledgeable players -- are becoming more pessimistic about the U.S. economy.

Conversely, if oil rises above $70 and remains above it, know that IIs are becoming more bullish -- optimistic -- about the U.S. economy.

Oil/Economic Analysis: How has the price of oil fared recently? At $91, it's well above the $70 demarcation line, but it is trending lower. If the price of oil continues to drop, and falls below $80, that would be other sign of trouble for the U.S. economy. A sustained drop below $70 would confirm.

However, if oil's price stabilizes at $80, then starts to rise again, in a sustained way, that would be a sign that IIs believe better quarters are ahead for the U.S. economy.

Of course, the oil barometer will not be valid after another, cheap, universal energy form is discovered.

But don't hold your breath waiting for that to happen.