Oil Rally May Be Economy's Undoing

**uscitizen** · 03-08-2008, 09:37 AM

Oil Rally May Be Economy's Undoing

Saturday March 8, 5:36 AM EST

NEW YORK (AP) — Preoccupied the last few months with shrinking credit and a slumping economy, Wall Street has all but ignored the relentless rise in oil prices that has taken a barrel of crude to a once-unthinkable $106.

But the market may not be able to look the other way much longer — especially when consumers, already hurting from the soaring cost of gasoline, find themselves paying even more to fill their tanks come spring.

"Investors are just getting used to higher oil prices in what has really been a stealth rally," said Peter Dunay, chief investment strategist with Meridian Equity Partners.

He said lofty oil prices "should be getting lots of attention" by Wall Street. But, investors have instead been distracted by a nearly endless stream of bad news about the economy — from banks taking steep write-downs for soured mortgages to the loss of tens of thousands of jobs.

To be sure, there is a lot for Wall Street to worry about these days. Major stock indexes have slid by double digits since the start of the year as economists fear the economy might already be in a recession. And, the summer's subprime mortgage collapse continues to threaten financial institutions around the world.

Although there certainly were many days last year that Wall Street tumbled in response to the punishing march in oil prices, the advance toward $100 a barrel at 2007's end and the surpassing of that milestone this year might actually have been welcomed by some investors. Institutions have been piling into crude — along with other commodities — to flee not just sagging stocks but also the flailing U.S. dollar.

The greenback's fall against other major currencies has helped drive buying across commodities as investors overseas view dollar-denominated assets as relatively cheap. Meanwhile, big institutional investors have used hard assets like oil as a hedge against inflation.

On Friday, oil prices jumped to a new record above $106 on the New York Mercantile Exchange. At the pump, gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon. And they can only go higher as the summer driving season, which always sends gas climbing, arrives.

Those prices, which have sent the cost of almost everything in the economy higher, are expected to translate into a further increase in inflation. A growing number of economists are becoming concerned that the Federal Reserve, which has been cutting rates in hopes of reinvigorating the economy, will be forced to stop because of the overall effect of more expensive energy.

Should the central bank cut rates at its March 18 meeting, which is widely expected, that move could also further weaken the dollar — and possibly keep the cycle of rising oil prices going.

Then there is the problem of an even greater impact on the consumer — whose growing hesitation about spending has been reflected in weak retail sales, even during the holiday season. What happens as gasoline prices in particular increase? The fear is that Americans, forced to pay more money for gasoline and overwhelmed by other economic issues, will continue to hunker down.

"The U.S. consumer, who has carried the economy for the past half-dozen years, is in full defensive mode, battered by falling housing values, spiking food and energy prices, tightening lending standards, the teetering stock market and hints of weakening in the labor market," said T.J. Marta, economic and fixed income strategist for RBC Capital Markets.

He said the consumer is clearly pulling back, and the retrenchment could dramatically pick up speed as energy prices rise. Losing the consumer — whose spending accounts for more than two-thirds of the U.S. economy — would have disastrous effects, analysts said.

Wal-Mart Stores Inc. reported better-than-expected same-store sales for February this past week. However, investors' cheer was short-lived as the gains appeared to come from bargain-seeking consumers who appeared to pare their purchases elsewhere.

http://finance.myway.com/jsp/nw/nwdt...&date=20080308

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