Oil prices of $50 a barrel had a surprisingly small effect on the overall economy. What will happen if the oil price hits $60? Americans may be on...
MEXICO CITY — Oil prices of $50 a barrel had a surprisingly small effect on the overall economy. What will happen if the oil price hits $60?
Americans may be on the verge of finding out.
Yesterday, crude oil soared $1.89 to a record $58.47 per barrel, and many analysts said it could soon break the $60 barrier.
But the economy will continue to grow anyway, even as motorists fork over ever more money at the gas tank and businesses face rising costs, some economists said.
- Seattle City Council kills sale of street for Sodo arena
- 9 arrested, 5 officers hurt as May Day anti-capitalist march turns violent
- Former Skyline High QB Jake Heaps signs with Seahawks
- Sinkhole forms above Sound Transit light-rail tunnel in Roosevelt area
- High court rejects franchises’ challenge to Seattle’s $15 wage law
Most Read Stories
“Yes, there’s a psychological impact. Gasoline is the most watched price in our country because it’s right in our face when we’re driving,” said Ray Perryman, president of the Perryman Group, an economic analysis firm in Waco, Texas. “But this is a remarkably resilient economy, and the expansion seems to have some legs.”
Adjusting for inflation, today’s oil prices are much lower than they were 25 years ago. For a time in 1980, a barrel of oil was worth the equivalent of about $80 in today’s dollars. What’s more, average incomes have risen since then.
Still, rising oil prices are bound to exact some significant costs on today’s economy.
Sharply rising fuel prices cost commercial airlines billions of dollars. Increased trucking costs can fuel price increases on a wide variety of goods.
Higher gasoline prices take a bite out of every motorist’s bottom line, leaving them less money to spend on everything else and making the economy more vulnerable to a slowdown.
“It’s a transfer from U.S. consumers to foreign oil producers,” said Thorsten Fischer, a senior economist at Economy.com, a research firm in West Chester, Pa. “Growth is certainly going to slow because energy prices have an effect on consumer income and purchasing power.”
Time was, oil shocks typically occurred because of sudden and unexpected disruptions to the oil supply, such as the Arab oil embargo of 1973 and the Iranian revolution at the end of that decade.
Recently, however, the main cause of soaring prices has been booming oil demand from the United States, China and much of the rest of the world.
“Demand internationally has been much higher in the last year than anyone expected it to be,” said Ken Miller, a vice president at Purvin & Gertz, a Houston energy-consulting firm. “That caught the whole energy complex off-guard.”
The global oil industry has less spare capacity than it once did. That makes it harder for oil markets to handle unexpected demand spikes or supply disruptions.
Even when there’s plenty of oil, it still needs to be refined into finished products like gasoline and jet fuel. But U.S. refining capacity is stretched to the limit.
At a meeting this week of the Organization of Petroleum Exporting Countries, or OPEC, oil ministers acknowledged that they had very limited control over prices, analysts said.
So the world’s growing thirst for oil will not soon be slaked by large supply increases.
“The markets said they didn’t believe that OPEC could increase production significantly, or at all,” said Lowell Feld, an analyst at the U.S. Department of Energy’s Energy Information Administration. “The markets said the emperor has no clothes, that OPEC is pretty much maxed out.”
Another cause of rising oil prices: “Speculation,” said Kyle Cooper, an analyst at Citigroup in Houston.
In such a tight market, most oil traders are betting that prices will keep rising, analysts said.
So will they soon hit $60?
“It could be any time,” Cooper said.
Oil prices probably won’t rise forever, of course. Daniel Yergin, a widely respected analyst and the chairman of Cambridge Energy Research Associates, predicted last month that prices would fall over the next two to three years, with $30 as a likely price floor.
For now, it’s not clear how high prices will go or what level would represent a serious threat to economic growth. But the economy could probably handle prices above $60 a barrel.
Thanks largely to rising energy efficiency, the economy only uses about half the energy it did 30 years ago to produce a dollar of output, said Mine Yucel, a senior economist and vice president of the Federal Reserve Bank of Dallas.
So high oil prices lead to less economic pain.
“In 1981, oil prices in today’s dollars were about 80 bucks, and we did go into a recession,” Yucel said. “Is an $80 oil price going to push us into recession now? Well, we’re a lot less dependent on oil now than we were then. That $80 price is not going to have the same effect.”