The US Economy Will Absorb Higher Oil Prices
The sudden surge in oil (NYSE:USO) prices in response to turmoil in Northern Africa and the Middle East has shocked the stock market out of its winter carnival, but a new, oil-led bear market is not on the horizon.
After three straight months of gains, the market was looking for an excuse to rest, and a jump in oil above $100 a barrel and then $102 a barrel on Wednesday seemed just the thing to rattle some nerves. Gold’s (NYSE:GLD) recent move to all-time highs didn’t help.
It will take a lot more than unrest in Libya — despite its holdings of sweet crude — to crank speculation in oil back to the record levels approaching $150 it reached in 2008. A much bigger paralysis to oil supplies or geopolitical revolution would have to occur, and so far protesters in Iran and even in China (NYSE:FXI) aren’t up to the task.
The resilience of the S&P 500 Index (NYSE:SPY) and the Dow Jones Industrial Average (NYSE:DIA) in the face of oil’s rise Wednesday showed that while oil is back in the global risk picture after a two-year hiatus, the recovery story still sits squarely in the bullish camp.
Recovery on track
Expectations for as much as 200,000 new jobs created when the government reports its February jobs numbers on Friday are holding more sway at the moment.
That’s not to say oil won’t have an impact on economies around the world if it stays above $100 a barrel, and there seems to be no letup in protest news from North Africa and the Middle East. Already gas prices are pushing $4 a gallon where I live outside San Francisco, and airlines have begun squawking about fuel costs again.
Given the positive economic numbers coming out of Washington and out of places like Germany in Europe, however, investors could be forgiven for thinking the bull market — two years old next week — has more room to run. Prices are certainly getting frothy but unless we really are in some prolonged, horrible bear-market correction, a straight shot back to early 2009 conditions seems unwarranted.
The revolution in the Middle East and North Africa this winter has got me thinking a lot about water recently. Each of those areas, while rich in oil, is poor in water (NYSE:PHO). Scientists expect that if water wars ever do break out, they’ll start in the Middle East or North Africa, adding a whole new troubling dynamic to the region’s fractured politics.
The concept of peak oil is familiar to most market followers. It’s the time in the future when the world reaches maximum oil production, and after that production starts to fall. The debate over peak oil is just a debate over timing right now.
Water is still so abundant that few outside of the financial engineer and environmental categories have begun to think about how people will be affected and what financial opportunities can be created from that. It is starting to become an issue, though, and that will only grow.
Water is a scare for another day. For now, either a currency shock or a broader spreading of revolution from the Middle East and North Africa, or a real municipal bond fright remain the major potential catalysts for a prolonged downturn in stocks.
The market is overdue for a weak month, and March came in like a lamb on this one so perhaps we’re here. In the meantime, though, investors are right to keep one eye cast on their profits and one eye tied to their breaking news twitter feeds.
Just watch out for the emails requesting assistance from deposed North African dictators. They’re starting to add up.
David Callaway is editor-in-chief of MarketWatch.