Record oil price unlikely to rattle economy
Thursday, January 3, 2008
NEW YORK -- With oil at the once unfathomable price of $100 a barrel, consumers can expect the cost of filling their gas tanks, heating their homes -- in fact, the price of most everything -- to also keep rising.
Still, analysts don't expect record-high prices by themselves to send the economy into recession, simply because expensive as oil is, energy doesn't consume as big a chunk of Americans' budget as it did decades ago.
"So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices," said David Wyss, chief economist at Standard & Poor's.
A barrel of light, sweet crude reached triple digits for the first time Wednesday, soaring 44 percent since August and 57 percent since the end of 2006. Meanwhile, gasoline prices at the pump reached a national average of $3.05 a gallon, according to AAA and the Oil Price Information Service. That's below their May peak of $3.23 a gallon but likely to go higher as the spring and summer approach.
"It's just crazy, I don't know how much worse it can get," said Susan Witte, of Fairless Hills, Pa., while shopping at a suburban Philadelphia sporting goods store one recent morning.
But Chicagoan Fraz Baig was unfazed as oil approached its milestone, although rising prices are making it more expensive for him to gas up his just purchased 2008 Infiniti FX sport utility vehicle.
"I'm doing well financially and I'm single, so I'm not really worried," said Baig, who works in Internet technology solution sales for IBM Corp.
Rising energy prices were cited as a contributing factor in disappointing sales for the just-ended holiday season, along with the continuing slump in housing and an overall uneasiness about the economy. But economists say that generally, the jump in oil is less devastating than previous spikes because incomes have risen faster than energy costs.
The percentage of personal income spent on energy was far higher in 1979-1980 than now, said Kay Smith, a macroeconomist at the Energy Information Administration.
In 1981, 14 percent to 15 percent of the nation's gross domestic product was spent on energy, according to Lester Lave, professor of economics at Carnegie Mellon University's Tepper School of Business. That's fallen to 7 percent today.
In part, that's because energy efficiency has increased.
"It's just not [as] important to the economy anymore," Lave said. "Prices are not high enough so that they're going to get middle-income people to change their behavior."
A tipping point
Still, that could change if prices keep rising. The question is at what point do prices start to truly hurt.
Lower-income families feel the effects of price increases most dramatically. With heating oil costs expected to jump 33 percent this winter, according to the Energy Department, families who rely on heating oil will have less money to spend on other things.
Diesel prices are also at record levels, which will affect the cost of food and, indeed, any goods that are shipped. Diesel hit a record price of nearly $3.50 a gallon at the end of November, according to AAA and the Oil Price Information Service.
Oil's march higher is expected to have more of an impact in the months ahead. For example, the chief financial officer of United Airlines owner UAL Corp. recently said airlines would have to keep raising fares or reduce capacity to compensate for rising fuel charges. Several carriers have announced new fuel surcharges in recent weeks.
Some analysts predict gas prices could rise as high as $3.50 to $4 a gallon next summer. And the Energy Information Administration predicts gas prices will set a new record national average above $3.40 a gallon this spring.
Many consumers have found ways to cope with higher energy costs.
James Ersery, of Chicago, commutes by bus to his job as a letter carrier for the U.S. Postal Service, so he's not being hit hard by higher gasoline prices. But at home, he turns down the thermostat when he's away.
Still, he shrugged off oil's rise.
"Prices have been extremely high for quite some time," he said.
Barbara Binik, a Realtor in Chicago, said that while higher prices haven't significantly altered her spending habits, a larger percentage of her disposable income is going toward gasoline, and "you feel it. It's out of whack."
She has cut back in small ways so far, such as by using a cheaper drive-through car wash instead of an automated one and eating out less. "I'm more careful about my spending."
Some analysts predict oil will continue to rise in the futures market, and if that's the case, $100 crude might sow the seeds of its own destruction. Many analysts believe higher prices will hurt demand, eventually.
"We think it important to keep in mind that all of the economic consequences of $100 crude are bearish, not bullish" for prices, Tim Evans, an analyst at Citigroup Inc. in New York, wrote in a recent research note.
Oil prices have risen in recent years as booming economies in China and India have grown exponentially and fed the perceptions that global crude supplies are not rising fast enough to meet demand.
Political problems and labor strife in oil-producing areas have also fed oil's upward momentum. In Nigeria, political upheaval has cut oil supplies from Africa's biggest producer by 587,000 barrels a day since the end of 2005, according to Energy Information Administration estimates. Renewed violence in Nigeria helped send crude to $100 Wednesday.
Any news about Iran's disputes with the West and conflict between Turkish armed forces and Kurdish rebels in northern Iraq has also sent crude soaring.
However, oil has also been pushed higher by speculators, who have come to see oil as an investment play as the dollar has weakened in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are also more attractive to foreign investors when the greenback is falling.
That has some analysts concerned that shift in speculators' strategy could just as easily send oil prices tumbling.
"We are still leaving open the possibility of a major price downdraft prior to month's end," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill., in a Wednesday research note.