Oil prices surge but no re-run of 73 crisis

Equity markets today are more resilient to the rise in oil price than they were in 1973 following the OPEC crisis but at almost $100 a barrel consumer spending will be impacted, said Ted Scott, manager of the F&C UK Growth & Income fund.

"Although equity market volatility has continued, the sharp rise in the price of oil in recent months has not affected markets as much as it has done in the past. The Yom Kippur war of 1973 and the OPEC crisis that followed saw the price of oil shoot up leading to a crash in stock markets and a global recession. Today however, despite the fact that Shell and BP remain the two largest stocks in the UK market, oil is a less significant part of the economy and unlike then, inflation has also been kept under control."

Scott said that a strong oil price was to a certain degree symptomatic of a strong global economy with the oil price driven to a large extent by an increase in demand from emerging markets, particularly China and India.

"China and India have significantly increased their demand for oil in recent years which is generally positive for stock markets. Obviously this is good news for the oil giants and other commodity stocks including natural gas and electricity companies, which should see the their earnings stream increase. However, with the prospect of higher utility bills and petrol prices, consumer spending will be hit but the detrimental impact should not be exaggerated."

According to Scott the price of oil was a contributory factor to the weakening dollar, which this week fell to record lows against the euro and 26 year lows against the pound sterling, but he added that international stocks and US exporters were set to benefit.

"With domestic stocks, such as house builders and mortgage lenders, still suffering the effects of the sub prime crisis, the US economy needs a weak dollar to boost exports. Provided the decline remains orderly, a weaker dollar should be supportive of stock markets," he concluded.