Stock markets never use much energy. Vigorous economies always do.
Equity markets are wheezing while the US economy-however tentatively-purrs. Markets for company shares eventually will realign themselves with economic fundamentals. The question of the moment is whether the mutual direction then will be upward or downward.
Continuation of the economy's solid performance-US gross domestic product in the first 3 months of 2002 grew at a robust rate of 6.1%/year-might pull equity markets out of their slides. On the other hand, stubborn market torpor might sabotage economic recovery by further slowing investment and reversing currently buoyant spending by consumers.
This is the most important uncertainty confronting the oil and gas industry. As the US economy-not the stock market-goes, so will go demand for energy in its various forms-and not just in the US.
Economic reassurance
Reassurance about the US economy came July 17 in a semiannual report to Congress on monetary policy by Federal Reserve Board Chairman Alan Greenspan. He took heart in the "mildness and brevity" of the downturn in an economy hit by slumping equity markets, slowing investment, and the terrorist attacks of last Sept. 11. While uncertainties remain, Greenspan said, "the fundamentals are in place for a return to sustained healthy growth: Imbalances in inventories and capital goods appear largely to have been worked off; inflation is quite low and is expected to remain so; and productivity growth has been remarkably strong, implying considerable underlying support to household and business spending as well as potential relief from cost and price pressures."
Greenspan's measured confidence wasn't enough to rescue equity prices, however. The day he spoke was one of the worst ever for the stock market. And the plunge continued. On July 22, the widely watched Dow Jones Industrial Average fell below 8,000 for the first time since October 1998. As recently as last March the average had been 25% higher.
Equity markets, of course, have been distracted lately from economic fundamentals they usually track. Multiple disclosures about corporate fraud, compounded by auditing lapses, have investors wondering what to believe in company reports. Flocks of them are reported to be fleeing the market. Because of the panic, analysts last week professed not to know where stock-price plunges might end.
Political pressure is intense for US President George W. Bush to reverse the trend. It's an election year. Presidents get blame or credit for economic developments whether or not they have anything to do with them. By that standard, Bush should benefit from the economy's apparent resiliency. But his opponents naturally focus on the reeling stock market as the proxy for national economic health. That's where the bad news is. And that's politics.
Bush, in fact, can't do anything about equity values and shouldn't try. He can do something about the panic depressing equity values, though, and says he eagerly will. He can sign tough legislation that at this writing was due any minute from Congress to treat corporate fraud as the serious crime that it is, to police accounting and auditing systems that have failed at self-regulation, and to provide for strong enforcement. That's the best antidote available for the recent panic, especially if accompanied by aggressive prosecution of business miscreants who have soiled the system that enriched them.
Opportunity for industry
For the oil and gas industry, disengagement of equity markets from economic indicators creates an opportunity. The popular tendency over at least the past decade has been to equate economic activity with aggregate equity values and to isolate energy consumption for regulation as strictly an environmentally regrettable phenomenon. In fact, energy consumption by nature represents work performed and is therefore a better proxy for economic conditions than the stock market. Beyond its environmental disadvantages, which have proven to be very manageable, energy consumption is a prime factor of national prosperity.
The US needed the reminder that equity prices are giving it that an economy is more than financial markets. With Congress now grappling over energy legislation, the country could use a further reminder about the inseparability of energy consumption and human well-being. Divergence of economic and market indicators makes this a good time for the industry to provide it.
