Why the Stock Market Has Liked the High Price of Oil Until Now

Let’s face it. Large American oil companies have profited handsomely from the high price of crude.

Exxon Mobile (NYSE/XOM) reported a first quarter 2008 profit of $10.9 billion — the second largest U.S. public company profit ever. (And the holder of the record for the largest ever quarterly profit by a public company? Why, Exxon Mobile, of course. In the last quarter of 2007, the company had a profit of $11.7 billion.)

The other big oil companies: ConocoPhillips (NYSE/COP) earned $4.14 billion in the first quarter; BP PLC (NYSE/BP) reported a profit of $7.6 billion; and Royal Dutch Shell PLC (NYSE/RDS-B) made $9.08 billion in the first quarter of 2008. When totaled, the big oil companies (many of which have not even been listed above) made close to $50.0 billion in profits in the first three months of 2008. A totally outstanding performance by the oil companies, all thanks to sharply higher oil prices.

The stock market loves big, fat profits. And that’s exactly what the market has received the past two years from the big American oil companies.

But it is not just the domestic oil companies getting rich on higher oil prices. According to a report just released by the U.S. Energy Information Administration, OPEC members will post close to $1.0 trillion in profits this year.

When you are in the stock market as long as I have been, when you study the price charts daily for 20 years like I have, you start to get a good feel for the likes and distastes of the stock market.

I believe that up until now the stock market has actually liked the higher oil prices, because the profits from the big public oil companies simply outweighed the reduced profits other companies were experiencing because of higher oil prices.

The Dow Jones Transports Index has been a star performer this year, until yesterday. As crude oil hit a new record high of $123.23 a barrel, the Dow Jones Transports Index started to fall apart, posting a loss on Wednesday of three percent.

What is the stock market telling us? It is telling us that higher crude oil prices have been acceptable to the economy on balance… but when crude oil starts to reach $125.00 a barrel (like it is now), the economy fallout will be quite negative.

Yes, I was the first to predict that oil prices would hit $100.00 a barrel many months before it happened, although my fellow economists thought I was surely wrong. Today, I’ve read two research reports that suggest that crude oil will rise to between $150.00 and $200.00 per barrel. With the stock market saying it doesn’t like oil above $125.00 a barrel I have my doubts about crude oil moving sharply higher from its current price.