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Oil prices will affect the whole US economy

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Steve Jessmore / AP

(Read caption) A gas station attendant raises prices for the second time Thursday Feb. 24, 2011, at a station in Myrtle Beach, S.C. How much will rising oil prices affect the rest of the US economy?

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We don’t especially like numbers here at The Daily Reckoning. You can’t trust them. But we follow a few of them anyway. Like these numbers…

107.01

12.70

The first number above is for the Dow. The second is for gold. They show us what happened in yesterday’s trading. And yesterday, the first number was negative. The second was positive.

Not that there aren’t a lot more interesting, provocative numbers around. But we only follow the big picture here. And those two numbers tell us most of what we need to know.

At least, they give us a good starting point.

The Dow number is going down because investors are worried. That’s why the gold number is going up too.

What if these Cereal Revolutions get out of hand? What if they spread to Saudi Arabia? What if oil prices keep going up?

“Gasoline at $4 a gallon?” asked a headline yesterday.

What would gasoline at $4 a gallon do to the US economy? This is another of those pieces of the puzzle that we mentioned yesterday. Ben Bernanke, who would probably make a fine high school math teacher, knows nothing about economics. He thinks all he has to do is to add more money and the whole “recovery” picture will be complete. Investors will see their stocks go up. Employers will hire. Shoppers will shop. Bakers will bake more. Shoeshine boys will start slapping the leather. Wheelwrights will…well, never mind.

But then, the puzzle pieces change shape. He pumps in money. The price of oil goes up. And food. And the Arabs, who depend heavily on grain imports, get themselves worked up. And then the price of oil goes up more. And stocks begin to fall. And US consumers pay more for gasoline…

…and suddenly, the picture is not at all what the Fed chairman had hoped for.

But wait. It gets worse. Look at a third number: 220. It’s what the big Japanese securities firm, Nomura, thinks the price of oil could reach, thanks to the Cereal Revolutions.

And maybe they’re right. Gaddafi is no Mubarak, say the papers. When he says he’ll fight…he could mean it.

And others are getting ready for a fight too. Saudi Arabia is trying to head off trouble. And reports tell us that China is worried and increasing its security measures.

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