Tuesday, May 12, 2009

Will rising oil prices choke off the recovery?

Crude oil is now breaching $60 per barrel. The question is, will rising prices choke off the recovery? Someone posed this question to me in an email earlier this morning. Here was my response:

Rising oil prices did not tank the stock market. In July 2008, when oil hit $150, the Dow was at 11,500 and while it was down from the peak in August '07, much of that decline was being driven by a financial sector collapse.

On the contrary, the stock market really hit the skids when commodity prices started falling.

The United States is a large oil producing country so rising oil prices tend to spur capital investment (you guys in Texas know that very, very, well) and that investment flows back into the economy.

I do not think that oil at $60 or even $80 poses a threat to the recovery or the stock market rally. In fact I would even welcome it on the basis that it suggests demand is improving and that's a sign the economy is getting stronger. Moreover, from a psychological standpoint, at least, higher oil prices provide a "Wall of Worry" for the market to climb.

The only thing that can kill this rally would be the government "taking away" the stimulus, by shifting toward budget balance. I don't see that happening this year or even next. Perhaps in 2011, when the next presidential campaign cycle gets underway.


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