U.S. economy easily weathers high oil prices, so far
www.iht.com
By Jad Mouawad The New York Times
SATURDAY, APRIL 23, 2005
Not long ago, the notion that crude oil prices would ever reach $50 a barrel, much less surpass that, was a distant and frightening prospect. Some economists darkly predicted that sky-high oil prices would send the American economy into a deep recession, drive companies out of business and bring back both inflation and angry fuel lines.
Investors seem to have returned to this idea lately, reflecting a general uncertainty over the course of the economy. Last week, they pushed stocks to their lowest since October because of worries that higher energy costs would crimp corporate earnings and stoke inflation.
But even as prices cling above $50 a barrel, the American economy has not gone into a recession. In fact, it has weathered the high prices with remarkable ease - at least so far.
The reason is that oil has been knocked off center stage in the U.S. economy. The decline in manufacturing and rise in service-oriented jobs mean oil is less indispensable for economic growth. Manufacturers and electricity-generating plants, once among the biggest users of oil, now depend primarily on natural gas, coal and nuclear power.
While the United States does consume more oil today, most of it is for transportation. And even as gasoline prices are hovering at record levels, the cost, adjusted for inflation, is still well below the peak reached in the early 1980s, and takes up a smaller share of Americans' income. This is not to say that the spike in gasoline prices is not starting to pinch. With retail prices in the United States expected to peak at $2.35 a gallon this summer as millions of people crowd the highways for their holidays, the high costs could turn into more of a burden.
Higher fuel prices have lately hurt slightly by curbing spending elsewhere. Retail sales rose only 0.3 percent to $339 billion in March, slower than February's 0.5 percent gain and lower than analysts expected. In another tell-tale sign, consumer confidence declined for a second month in March.
Most worrying were fears of rising inflation, which resurfaced this week after the government reported that the consumer price index rose 0.6 percent in March, the largest increase in five months. The core rate, which excludes food and energy, had its biggest monthly jump in nearly four years.
But today's economy is more efficient than it was three decades ago.
It takes 55 percent less oil and gas to produce the same dollar of gross domestic product today than it did in 1973. At the same time, Americans' income has doubled.
Still, every one cent increase in petroleum prices adds $3 billion a year in costs for consumers, which in turn translates into a larger trade deficit, higher costs of goods, and lower real income, according to the American Petroleum Institute. For gasoline alone, every penny increase means over $1.4 billion in higher costs. "That is money that will not be spent on other goods and services," said John Felmy, the institute's chief economist.
Oil prices, which have averaged about $20 a barrel throughout the 1990s, started to rise significantly at the beginning of 2003. They reached a high of $58.20 a barrel on the New York Mercantile Exchange on April 4 and traded at $55.55 on Friday.
Some economists argue that since the increase has been paced - unlike previous oil shocks when prices spiked in a matter of weeks - the economy has been able to absorb it without spinning into a recession.
High energy costs have also been kept in check by low interest rates and low inflation, according to Kenneth Rogoff, a professor of economics at Harvard University.
"When people see a spike in oil prices, they don't immediately infer that we'll see double-digit inflation," he said.
So how high must prices go before consumers feel the effects and the economy starts hurting?
"I don't know that there is a cliff to walk off from," said David Wyss, the chief economist at Standard & Poor's. "It's more like a slippery slope. It would probably take a doubling of oil prices to get us to the same situation as 1981."
While oil has been flushed out from most industries there is still one place where no substitute has been found. Each day, American drivers burn 11 percent of the world's crude oil in the form of gasoline, or more than half the daily consumption of crude oil in the United States. And they have noticed the increase.
Take, for example, Lesli An Orio, a 38-year-old Web-site manager in Charlotte, North Carolina. Returning from her honeymoon a year ago to ever-rising gasoline prices, Orio decided to leave her new silver Subaru Outback at home and ride the bus to work. She moved her two boys to a public school closer to home in January so they would not have to ride 38 miles, or 60 kilometers, to their private school in the family's super-sized Ford 150 pick-up truck.
Orio says her new routine saves her about $368 a month in gasoline costs and another $125 in monthly parking fees.
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