Price Pinch Unlikely to Halt Economic Growth
By Nell Henderson
Washington Post Staff Writer
Friday, June 4, 2004; Page E01
The recent rise in oil prices is likely to throw some sand in the wheels of the U.S. economic recovery this year, but not enough to derail it, economists said this week.
Even with crude oil prices around $40 a barrel, analysts said the recent increases just haven't been big enough to significantly brake a strongly expanding economy that is far less energy-reliant than it was in past decades, when soaring oil prices often preceded recessions.
The forecasts assume no major terrorist disruption of key Saudi Arabian oil fields -- a notable caveat after the attack on foreigners there last weekend. If such an event sent prices skyrocketing to $60 to $70 a barrel, that would have much more damaging effects, depending on how long they would stay that high and how consumers and businesses would respond.
"The momentum of the U.S. economy now is so strong that it would have to be a major oil crisis" to have a big impact, said Nariman Behravesh, chief economist for Global Insight Inc., an economic research firm.
Crude oil prices would have to rise to around $50 a barrel for at least three to six months to qualify as an economic shock comparable to those of the 1970s, Morgan Stanley chief economist Stephen S. Roach said in a recent analysis by the firm's global economic team. After adjusting for inflation, current oil prices are only about half what they were in 1981-82, when they hit their record highs.
Still, the recent rise in oil costs inevitably carves into consumer and business budgets, leaving less money to be spent on other things. If current prices are sustained, that should slow economic growth by about half a percentage point off a pace that is running somewhere above a 4 percent annual rate, many analysts estimate. That slice is worth tens of billions of dollars in an $11 trillion economy.
Higher oil prices are not bad news for every sector of the economy. The beneficiaries obviously include U.S. energy companies and energy-producing states.
The hard-hit, though, include the airline, trucking and petrochemical industries. The U.S. auto industry could suffer if motorists turn from gas-guzzling trucks to less profitable but more fuel-efficient smaller vehicles -- which hasn't happened yet.
The biggest impact to the economy is likely to be measured by how higher gas prices affect other consumer spending, since it accounts for about two-thirds of all U.S. economic activity. But energy costs account for only about 7 percent of all household expenditures, with gasoline less than half of that, according to the Bureau of Labor Statistics. And the price increases are coming at a time when consumer incomes and total spending are rising because of an improving job market.
In the first four months of the year, higher oil prices absorbed about $30 billion from the $120.4 billion increase in households' inflation-adjusted, after-tax income, by some estimates.
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