Is Oil Finally Too High?

Story Highlights:

• Oil prices are again making headlines and touching new highs, reigniting fears of an imperiled economy and market weakness.
• Today's high oil prices don't mean economic or stock market woe must follow. In fact, we see high oil prices as an effect of economic strength, not a cause of economic gloom.

Have oil prices finally gone too high? Will $100 oil sink the economy?

The short answer is: No.

Here's the longer version, starting with some facts:

• Oil is STILL BELOW its inflation-adjusted levels of the late-70s/early-80s.
• As oil prices rose over the past few years, GDP has grown globally; earnings have grown globally; consumption has grown globally; and productivity has grown globally.
• History shows there is little or no correlation between stocks and oil prices.

In addition to these, we note oil's rise hasn't been a "shock" to the economy. The rise in prices has been steady and relatively slow over the last years. That's more important than it might seem at first. Big surprises are what ding stocks and dislocate economies most. Free market systems are surprisingly good at modifying themselves to changing conditions given enough time.

We live in a world of high demand and constrained supply. That oil prices are rising—but gradually—allows everyone to adjust accordingly. This isn't always intuitive to government officials who believe every "problem" requires an organized/centralized solution.

Most folks think high oil prices "cause" trouble. But it's just as valid (in our view, much more valid) to say high oil prices are an effect of economic strength, not a cause of economic woe. This is less theory than a statement of fact—it's precisely what's happened over the last several years.

In a world without petro-politics, oil is perfectly fungible. That means we can get oil from OPEC, from Canada, South America—wherever—and it's pretty much all the same. Whoever can supply the most to those who demand it cheaply and efficiently will make the sale. Those are great free market conditions—but unfortunately it's not fully the case today.

The price of oil is highly manipulated by world governments, and that's where today's true risk lies. So-called "petro-politics" can spawn protectionism, mercantilism, and factionalism—the antitheses of free market enterprise. Putin's near-tyrannical control of Russian oil assets, Chavez's outright seizing of Venezuelan oil companies, and the workings of OPEC are just a few examples.

Additionally, government taxation is a danger. This most recently popped up in Canada:

Canada Stocks May Rise on Tax
By John Kipphoff, Bloomberg

Government meddling aside, we see few risks from today's higher oil prices. The myth is higher oil drives stock markets down, but we see no evidence of that. What media types fail to note when howling over higher oil is historically, there's no meaningful correlation between oil and stock prices. None! You can measure for yourself using S&P 500 index data and oil prices you can find free on most any finance website. And those squealing loudest over high oil prices fail to mention a trigger that would cause oil prices to suddenly start impacting stock prices over the long term going forward. All they say is high oil is bad, and fail to provide any data or proof.

At this point, oil simply isn't expensive or scarce enough today to sink stocks or the economy. And, modern economies are becoming more energy efficient, not less, so higher oil doesn't pack the economic wallop it once did.

Oil: No Longer a Heavyweight
By Steve Hargreaves, CNNMoney.com

We see higher oil as symptomatic of a healthy global economy that demands energy to innovate and grow. Don't let scary, baseless headlines spook you out of today's great opportunities.