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US Stocks Rally Even as Oil Reaches Record High, Dollar at New Low


The price of a barrel of oil reached another record high in New York Friday, rising $1.40 to $91.80. VOA's Barry Wood reports that analysts are puzzled as to why the quadrupling of oil over the past four years has not pushed the U.S. and world economies into recession.

Before falling back slightly, oil reached a peak of more than $92. Crude has risen more than ten percent over the past four weeks. It has doubled in price in the past two years.

Analysts say the world economy has absorbed these increases because, unlike the 1970s, oil prices have risen steadily, without an external shock to trigger a sudden unexpected increase. Also, the world economy is much bigger and less dependent on petroleum than during the two price shocks of the 1970s.

When adjusted for inflation, the then record price of $40 a barrel in 1979 would be $102 today.

Jim Smith, an oil economist and forecaster in North Carolina, says that as the 2008 Chinese Olympics approach, China will temporarily shut down factories to ease pollution, easing demand for oil. He predicts that as global economic growth decelerates oil prices will come down.

"Dramatically! Chinese demand growth will slow significantly the closer we get to the Olympics and especially after the Olympics. So, you could see a real collapse in world oil prices even without any conflict," he said.

Smith expects the oil price will fall 50 percent.

The turbulence in financial markets continued this past week. Gold soared to another 27-year high of $783 an ounce. And the dollar touched another record low of nearly $1.44 against the euro, the currency used by 13 European Union countries.

But Wall Street took these developments in stride and closed higher this week. The Dow Jones Industrials gained 134 points, or nearly one percent, on Friday. The Dow Industrials are now not far from the record high touched earlier this month. Economist Jim Smith says stocks are rising because investors believe the Federal Reserve, the U.S. central bank, will cut interest rates at its policy-making meeting on October 31st. Smith expects a one-half percent, or 50 basis point cut, in the overnight lending rate aimed at stimulating the economy. "If 50 basis points on Halloween doesn't do it, we'll get 50 more in December. And if that is still looking terrible, we'll keep cutting," he said.

Bond market specialist Bill Gross in Newport Beach, California expects only a quarter of a percent cut in short-term rates on Wednesday. Forecasters say the central bank will cut rates to stimulate an economy that has slowed because of higher oil prices and a weak housing market.