Money Control - 29/4/2006

Oil prices have stayed above USD 70 a barrel this week, after hitting a record high of over USD 75 a few days ago. Yet, that hasn't held back the markets. In fact, the Dow is within reach of its all-time high. So, are oil prices not tied to the stock market? Not always, it seems.

According to Lakshman Achuthan, MD, Economic Cycle Research Institute, "Essentially we're in a strong business cycle upswing and even though you have the energy price spiking and you have the Fed raising interest rates - for the past four-five times that's happened you've had a recession - even though that's occurring, because the drivers of the business cycle remain strong you don't have a strong downturn."

And while the pool of petrodollars is growing with every gallon of gasoline sold at the pump, that's not necessarily what's propping up the stock markets, in the US or elsewhere.

Ken Goldstein, Economist, The Conference Board says "The amount of money to be invested most of it's coming not from petrodollars recycled but most of that's coming from pensions, IRA money, 401k money to be invested in the stock market and with the housing market starting to cool that's not going to change dramatically."

He continues, "So I think the source of funds, both the domestic source and certainly some foreign capital not just petrodollars but also some Asian dollars coming back in and being invested is keeping the stock market relatively strong, and it's not just Wall Street."

Experts say the current surge in oil prices is different from previous episodes in the seventies and mid-nineties.

There are more domestic demands on oil money in producer countries, more sources, and promising alternatives look more viable. So oil doesn't impact the global economy as much as it used to. But it still packs a punch. If oil prices continue to climb, and the US economy slows down, as it's expected to late this year, the double whammy could put the brakes on Wall Street.