Do high oil prices even matter? By the looks of things—namely stock prices, corporate profits, and consumer confidence—the answer would seem to be a resounding "no."
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But looks can be deceiving.
To be sure, the Conference Board reported this morning that consumer confidence hit a new four-year high despite gasoline prices approaching $3 a gallon. Meanwhile, corporate profits continue to climb despite record energy costs.
Indeed, analysts on Wall Street recently upped their earnings forecast for the Standard & Poor's 500 index. Instead of growing by roughly 11 percent, blue-chip earnings are now expected to jump 13 percent in the first quarter of 2006, according to Merrill Lynch.
"To me, the big surprise has been profit margins," said Chris Orndorff, head of equity strategy for the investment management firm Payden & Rygel. "If you would have interviewed me several months ago and asked me what the effects of rising commodity prices would be, I would have expected a narrowing of profit margins, which would have foretold a decline in earnings. But that just hasn't happened."
Keep in mind that one reason corporate earnings look so good now is that the energy sector itself is posting record earnings thanks to record prices for its goods and services. In the first quarter, nearly 40 percent of S&P 500 earnings growth will come from rising profits at the nation's oil and energy companies.
Furthermore, there is a lag time between rising oil prices (and for that matter, rising interest rates) and the effect on the broad economy.
Consider that in the immediate days and weeks after Hurricane Katrina last year, when oil prices shot up to $70 a barrel, there was little indication of an economic slowdown based on government data. It took a few months before economic reports showed the damage caused by high oil prices in the wake of the storm.
