It’s tough to pin down exactly why the economy is doing so well, and there’s probably no one reason why we’re keeping our head above water as well as we are considering the high price of.. well, just about everything.

But as a BusinessWeek article suggests, maybe it’s the higher price of everything, namely oil, that’s keeping the air in the economy.

Along with bigger profits in big oil comes bigger investments in the U.S. economy from big oil.

When you operate in a highly speculative industry, and you’ve landed yourself a windfall throughout your industry, where is the safest place to put your hard earned (with tongue in cheek) money?  The U.S. treasury, of course.

Oil companies have been throwing their profits into U.S. Treasury bonds that provide smaller (relative to the oil industry) yet near guaranteed returns.

Now that oil prices are “plunging”, there is less money being dumped into U.S. securities that hold down long term rates.  Unfortunately, there isn’t much the Fed can do about it as they only control overnight rates.  A problem former Fed Chairman Greenspan calls a “conundrum”.

I believe that microeconomic view that oil prices are plunging is being overblown.  Yes, oil prices have come down, but they haven’t been plunging (as I’ve said before).  Even at $60 per barrel (remember when $30 oil was expensive? It was only 2001!), oil companies are making healthy (while not record) profits and they want to reinvest in more secure, diversified ventures.

The largest driving factor behind the influx of oil money into the U.S. economy, and the largest driver of long term interest rates is still China.  They’ve had a booming economy that has run rampant over the last few years, and they are starting to try to rein in the ballistic missile that has driven up demand for oil in their own country.  In effect, they’re starting to cut back on exports, and funnel their own money back into their own economy and treasury.

While I think the effect of big oil on long term interest rates is not quite as extensive as many think, I also believe we are at the mercy of other countries more than ever.  A position we haven’t been in for quite some time.

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