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Oil: What goes up ...
Sure, the economy is shrugging off oil for now, but sometime prices will hit the tipping point.
August 12, 2005: 8:44 AM EDT

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NEW YORK (CNN/Money) - This morning I got an email from a friend and colleague asking me if I think it makes sense that the stock market is shrugging off the eye-popping, chart-topping (my adjectives, not hers) run-up in oil prices.

There's no doubt that the rally in stocks in the last hour of trading was stunning in and of itself. How could stocks shoot up like that on a day when oil traded as high as 66 bucks a barrel and closed well over 65 dollars? The only way this makes sense is that the economy is still strong in spite of these sky high oil prices.

And that's because, the economists tell me, oil prices over the past few years are higher, and much higher over the past few weeks, but income in that period – of consumers and businesses – is up by a larger amount, so the middle-income and higher among us can well afford them.

And remember, unlike the 70's and 80's and 90's oil shocks, this spike up in oil is not being caused by a supply disruption that is cutting off supplies of oil and forcing prices higher (remember the Arab embargo? Remember when Iraq invaded Kuwait?) and therefore clobbering consumers and the economy. This time it's U.S. consumers and businesses who are spending and driving the economy and driving demand for oil and gas and heating oil higher.

We buy a lot of stuff from China and they are still pretty much booming and they are consuming more oil too. So what we see is we are all driving the economy and therefore sending oil higher instead of oil driving the economy lower.

So the stock market can shrug it off for now. Meanwhile oil sows the seeds of its own demise: at some point it gets so high that it finally slows the economy, demand slows and oil tumbles down.

But it's not happening yet. The latest U.S. inventory report showed flat inventories and sales still growing, a recipe for more output. Just remember, to paraphrase an old Jimmy Cliff song, the higher they go, the harder they fall.

_______________________________

-- Kathleen Hays is economics correspondent for CNN and contributes to Lou Dobbs Tonight. You can read more of her columns here.  Top of page

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