The new math of oil

High energy prices are always bad, right? Not necessarily.

(Fortune Magazine) — We’re hard-wired to tremble when oil prices rocket, and the past few weeks have looked like another example of why. Whenever stocks fell sharply, as they did several times, traders blamed the fast-rising price of oil.

But that chain of logic is misleading. The bigger picture shows that the relation between oil and the economy is changing, and we’ll have to rewire our brains to understand what’s happening. Watching oil prices rise and fall is no longer enough; the key now is understanding why they’re moving.


You know something strange is going on when you step back and examine the stock market’s performance not of the past three weeks but of the past five years. As oil prices have surged, they haven’t knocked down stocks or hobbled the economy. Instead just the opposite has happened: Oil has tripled, yet stocks have roared ahead to new records, and the U.S. economy has grown smartly over the whole period. That is not how things work, or so we learned after oil spikes triggered recessions in 1973, 1980, 1981, and 1990.

The critical insight into what’s happening comes from Daniel Yergin, chairman of Cambridge Energy Research Associates and a longtime authority on world energy. “This is a demand shock, not a supply shock,” he says. “What’s causing it is the extraordinary economic growth of the past few years.”

Fortune