Is $25 Oil Too Expensive? Not By Some Inflation Measures: Spotlight
By Mark Pittman
Is $25 Oil Too High? Not By Some Inflation Measures (Update1)
(Adds GDP figures in 5th and 15th paragraph.)
New York, Sept. 30 (Bloomberg) -- If you think yesterday's
crude oil price of $25 a barrel was too high, consider this:
Adjusted for inflation, oil costs the same as in October 1973,
just before an Arab oil embargo set off the price shocks of
the 1970s.
``In today's dollars, it's not that big a deal,' said Alan
Struth, an economist at Honeywell Bonner & Moore in Houston and
the former chief economist at Phillips Petroleum Co.
Oil prices would have to go a lot higher to damage an
expansion of the U.S. economy that's lasted nine years,
economists said. For oil to reach the equivalent of prices before
the U.S. went into recession in 1982, it would have to be about
$72 a barrel. ``That's expensive,' Struth said.
While oil is a long way from $72, it's also well above $5 a
barrel in the early '70s and the $10 it fetched as recently as
last December. Prices have doubled this year, surging so far and
so fast that some investors are concerned inflation will pick up,
a sentiment that's contributed to a 9 percent drop in U.S. bonds
this year.
Yet high oil and gasoline prices are less likely to rouse
inflation than in years past. This year, they are only about 1.4
percent of the U.S. gross domestic product, less than half their
impact in 1981. Still, the rally may slow economic growth and
dampen consumer confidence. One look at the corner filling
station shows just how much oil can affect expectations.
The pump price of gasoline has risen for 12 of the past 15
weeks and is close to a three-year high, according to the U.S.
Department of Energy. In some parts of California, premium grades
have fetched more than $2 a gallon this year. So it's no surprise
that consumers take little solace in the notion of inflation-
adjusted prices.
Consumer Confidence
``If you track the consumer confidence index with the price
of gasoline, there's a high correlation,' said Paul Kasriel, an
economist for Northern Trust Securities in Chicago. ``When
Americans are happy, they buy cars. When the price of gasoline
goes up, they're unhappy.'
U.S. consumer confidence has fallen for the past three months
from a 30-year high in June -- a period that coincides with a 15
cent rise in the national average price for regular gasoline.
Pump prices, adjusted for inflation, fell to all-time lows in
February, when the consumer confidence index was in the middle of
an eight-month, 16 percent increase.
Struth, the oil economist who lived in Bartlesville,
Oklahoma, until this month, said gasoline there fell as low as 72
cents a gallon last year. Now, it's $1.25. ``But $1.25 a gallon
is no big deal,' he said. ``It would have to go up to $1.40 or
$1.50 before people would notice.'
Higher Prices
And that could happen if oil keeps rising, as expected, in
coming weeks. Oil could climb close to $30 a barrel before the
end of the year, some analysts say, prolonging a stunning rally
and dashing long-held expectations that global oil surpluses
would keep price gains in check.
As recently as mid-February, oil was languishing at $12 a barrel.
Since then, it's zoomed ever higher as producers limited
supplies. ``When you start at $12 a barrel, prices seem a lot
higher' now, Struth said.
This year's rally was built on output cuts by oil-producing
countries, and especially members of the Organization of
Petroleum Exporting Countries. In all, exporters have cut
7 percent of world supplies and aim to end the global glut.
The rebound of 1999, after two years of steady declines,
shows crude oil wasn't sustainable at levels that reached a 12-
year low of $10.35 a barrel in December on the New York
Mercantile Exchange, analysts said.
Changed Expectations
``We never expected oil prices to maintain at $10 anyway,'
said Adam Cole, an economist at HSBC Securities in London. ``We
always thought they would recover to around $17 to $18. They have
overshot that somewhat, but it's not going to force us to add
another half-point to our inflation forecast.'
Oil and gasoline's estimated 1.4 percent impact on the GDP
this year is up from 1.3 percent in 1998, when fuel prices were
lower. In 1996, when crude oil rose above $26 a barrel, oil and
gasoline made up 1.6 percent of the GDP. By comparison, they were
2 percent in 1973 and 3.1 percent in 1981, according to Commerce
Department figures.
Some economists say that a doubling of oil prices this year
will begin to eat into company profits and consumer pocketbooks
in the form of higher energy bills.
For the U.S., oil prices at $25 a barrel would reduce the
GDP in the fourth quarter of 1999 by 0.2 percentage point from
the same period last year, said Chris Varvares, president of
Macroeconomic Advisors LLP of St. Louis.
U.S. GDP would fall by 0.3 percentage point in 2000 and by
0.4 percentage point in 2001 if prices stayed that high, Varvares
said. Unless the price continues to rise, the effects fade after
the third year, based on the firm's computer models, he said.
Rally May End
The crude oil rally may not last that long. Prices will
probably rise for another six weeks to almost $28 a barrel,
according to a Bloomberg survey. Eight analysts surveyed last
week predicted that crude oil will top out at $27.63 a barrel on
Nov. 17. The analysts expect prices to fall back by Jan. 1, to
$23.91 a barrel.
High oil prices will eventually mean more production, both
inside and outside OPEC. Oil fields and investments that weren't
economical at $12 a barrel become much more attractive at $25.
That will, eventually, bring prices back into their traditional
range, analysts said.
``I don't think it's in anyone's long-term interest to have
crude oil in the upper 20s nor in the low teens,' Struth said.
``But $17 to $22, everybody can live with that.'
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