Reasons for a Sweeter Scenario in 2007

The last month has given investors a lot of evidence of how a modest pullback in oil prices can fuel a stock market rally. For example, on Sept. 8, the $1.07 drop in the price of a barrel of oil (for October delivery) to $66.25 was enough to reverse a two-day selloff and push the Dow Jones Industrial Average up 31 points.

And the decline in oil from $77 on Aug. 8 to recent levels was enough to propel the S&P 500 Index to a 3% gain for the month and to sustain the market's rally into the historically weak last two weeks of August. The S&P 500 climbed 1% during that period.

A Domino Effect

Gross domestic product numbers don't react that quickly to short-term changes in energy prices, but $64-a-barrel oil in June 2007 would be enough to give the economy a big boost over the course of a year. Consumers would have more to spend -- or at least not less -- thanks to lower or steady prices at the pump.

Lower fuel prices would take the pressure off profits at companies from airlines to truckers to railroads to retailers such as Wal-Mart(WMT Quote). The Federal Reserve would breathe a sigh of relief, too, if energy costs stopped pushing prices upward, and Ben Bernanke and company at the Fed would be more likely to keep their fingers off the rate-increase trigger.