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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (5352)	1/18/2004 8:11:00 AM
From: Pogeu Mahone	Respond to of 110194

don`t worry be happy<VBG> boston.com ECONOMIC LIFE US no longer over a barrel By Charles Stein, Globe Columnist, 1/18/2004 Energy prices soared in the mid-1970s and the United States economy experienced a recession. The same thing happened in the early 1980s and again in the early 1990s. Energy prices are soaring again today. Should we be worried? ADVERTISEMENT The price of oil touched $35 a barrel last week. Natural gas is selling for about $6 per thousand cubic feet. In both cases, the prices are roughly twice as high as they were for most of the 1990s, when low energy prices helped fuel economic prosperity. Cold weather explains part of what is going on now, but only a small part. Let's start with oil. On the demand side, a growing world economy has a growing thirst for oil. China is using more oil than ever to power its booming factories. Its Asian neighbors are doing the same. On the supply side, Iraq has yet to reach its full potential as an oil exporter and Venezuela continues to have production problems. Then there is OPEC. Once the gang that couldn't shoot straight, OPEC lately has shown a good bit of discipline. Its members are sticking to their quotas, which keep supply down and prices up. OPEC always has an incentive to push for relatively high prices, but these days it has an extra incentive: the weak US dollar. Because oil is priced in dollars, the falling dollar cuts OPEC's purchasing power. To compensate, the oil producers have let prices stay above their official target of $28 a barrel. Forecasters expect prices to drop in the coming months, but not dramatically. The gas story is a little different. Demand is up because natural gas has become the fuel of choice for electric power plants. Gas creates less carbon dioxide than other fossil fuels, a big plus in a world worried about global warming. Unfortunately the supply of gas has not kept pace with demand. Drillers in the United States and Canada are looking for gas. The trouble is they aren't finding much. Stephen Brown, director of energy economics at the Dallas Federal Reserve Bank, said it could be a long time before major new supplies of gas become available. "I could see natural gas prices staying high for years to come," he said. The bottom line: The lower energy prices of the 1990s may be a distant memory. But when you bounce this news off economists, they react mostly with a shrug of the shoulders. "It is not a significant problem," said Mark Zandi, chief economist at Economy.com. "It's a small negative," said David Wyss, chief economist at Standard & Poor's. Why the blase attitude? Two reasons. First, when you adjust energy prices for inflation, they don't look all that high. In the early 1980s, oil was selling for more than $30 a barrel, about the same as now. In today's dollars, however, those 1980s prices would translate to roughly $75 a barrel, said Brown. "We've seen much higher prices," he said. Second, even with all the giant SUVs on the road, the United States is a more energy-efficient nation than it used to be. Put another way, it takes less energy than it once did to create a dollar of output. Energy conservation has helped. So has the decline of manufacturing. Many of the factories that once consumed great quantities of energy have moved to China. A simple way to see how much the world has changed is to look at consumer spending. In 1981, about 9 percent of all the money consumers spent went to pay energy bills. The comparable number today is 5 percent. Remarkably, US consumers now spend a smaller share of their dollars on energy than they did 30 years ago, when oil sold for $3 a barrel. I don't mean to suggest higher energy prices don't matter. They do. Like taxes, high oil and gas prices force us to spend money that might otherwise be spent on something else. Like taxes, they are hard to avoid, unless you plan to give up driving or sit shivering in the dark. But the good news is that expensive energy won't impose a huge burden on Americans and won't derail the current economic recovery. Keep that in mind next time you have to pay $1.75 for a gallon of gas. Charles Stein is a Globe columnist. He can be reached at stein@globe.com. © Copyright 2004 Globe Newspaper Company.