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 US 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 industrialised 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.
