Gasoline prices hover near the $5 a gallon mark at an Exxon station in Washington on March 2.GARY CAMERON
Investors love bubbles, but they also need something to worry about. The latest is the oil price. Brent crude is nearly a fifth higher per barrel now than at the end of 2011 - at $123, not far off its 2011 peak of $127. Gasoline at the U.S. pump is approaching $4 a gallon. Oil producers may be happy, but everyone from President Barack Obama's re-election team to mom-and-dad stockpickers are watching nervously. They should worry less.
For a start, there is more than one factor driving up the oil price. The impact of rich-world quantitative easing on dollar-denominated assets such as oil is hotly debated. But what is certain is that there is hardly a squeeze going on at the moment. Oil demand is falling in industrialized countries, as HSBC points out. Even in China, consumption in December was only 1 per cent up year on year, compared with a 10 per cent clip a year ago. That leaves political risk around Iran as the most likely reason for this latest price surge, rather than any nastier structural issue.
But even if the oil price grinds higher, equity investors should not fret. Equities actually do well in times of rising oil prices because higher prices mostly reflect robust global growth. Only if the rise is sparked by a big supply shock - the first oil crisis in 1973, or Iraq's invasion of Kuwait in 1990 - do stocks go into retreat. A blockade by Iran of the Strait of Hormuz, through which a fifth of global oil supplies travel, would fit the definition of a supply shock and take all bets off the table. But a resolution of the Iran problem would drain oil of its risk premium.
It is true that higher oil prices eventually hurt economic growth, although many countries are less dependent on it than they were. The big problem today, however, is that the policy tools in the U.S. and Europe, which are now helping to solve a different sweep of issues, are set completely the wrong way around to fight higher oil. Worse, these economies would not yet stand a reversal in those policies. Whatever the near future for oil prices, all anyone can do is watch.