Commentary: Stocks pay attention as oil spike hits

In inflation-adjusted terms, the all-time high of oil prices, reached during the first oil crisis in the early 1970s, was somewhere around $106 to $108 a barrel.

By DAVID CALLAWAY, MARKETWATCH
oil barrel 88 (photo credit: )
oil barrel 88
(photo credit: )
MarketWatch: In-depth global business coverage Wall Street gasped, then guffawed, two years ago when Goldman, Sachs & Co. analysts said the oil market had entered a multi-year "super-spike" period that would ultimately send crude prices as high as $105 a barrel. Oil was averaging around $50 a barrel at the time, well into the Iraqi war, and there was not much reason to see it going any higher then $60, or for the very bullish, $70. But I knew Wednesday morning that the current spike, a speculative frenzy if there ever was one, was the real thing when I saw a story in my newspaper about how higher oil prices no longer mean much to the US economy. This type of denial, just like the "It's different this time" philosophy about revenue and profits that swept Internet stocks in the late 1990s, is typical of the late-stage, super-spike price runs of a speculative bubble, and oil is no different. While $105 a barrel seemed like a huge leap of faith two years ago, it's only a little more than 20% from where oil closed Wednesday, at $87.12 a barrel, after touching a record $89. Oil is up 8% just in the few weeks since the Federal Reserve slashed interest rates to help stem the credit crisis, in the process igniting one of the strongest commodities rallies in years as the prospects of a higher inflation rate suddenly improved. For those of us who thought the speculative money had long left the energy sector, this has been a stunning new leg of the multi-year rally. Almost on cue Wednesday morning as oil hit $89, equity investors finally woke up and dumped shares, turning a nice Nasdaq-led surge in early trading into a 100-point decline on the Dow Jones average by mid-afternoon. Then, as oil backed off, stocks began rising again. The rally has happened fast enough that the higher prices haven't yet really filtered through to higher gasoline prices, though experts think this could happen in a matter of weeks, if not days. The higher prices also haven't been factored into corporate earnings, particularly the consumers of oil and gasoline, such as the airlines. Once the market starts taking this into account, the dismal performance we've seen in the past few days since earnings season began can only get worse. Yet still, despite falling house prices, soaring energy prices, a credit crisis hitting the financial sector, and increasing concern about more violence in the Middle East, the amazingly resilient American consumer continues to pack malls, restaurants, highways, popular air routes, concerts, and sporting events, as if the bill for all these hijinks will never come due. As oil rose over the past several years to $20 a barrel, $30, $40, $50, etc., one of the popular games among market experts was to predict what point the price would need to get to for consumers to really sit up and take notice. Many thought $80 a barrel would be it. Now that we're above that, it's clear it will be something above $100. In inflation-adjusted terms, the all-time high of oil prices, reached during the first oil crisis in the early 1970s, was somewhere around $106 to $108 a barrel. That's just about where Goldman sees oil going. What that translates to in terms of gasoline prices, I don't know. But many economists think $4-a-gallon gasoline will be the turning point. Last time I filled up at the pump, we weren't there yet. But it was painful enough already. With the falling value of the US dollar exaggerating the rise in dollar-priced oil, it's clear there could be a ways to go in this super-spike. And it could happen pretty quickly. Who would have thought we'd ever long for the days of $50-a-barrel oil? MarketWatch: In-depth global business coverage