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Oil Prices and the Economic Recovery

Posted By Nicolas Loris On April 12, 2010 @ 5:45 pm In Energy | Comments Disabled

As oil prices steadily rise, many oil and gas experts fear higher prices could stunt economic recovery, not just in the United States but around the globe. From the Financial Times [1]:

This week oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again in the offing. This was after a period of eight months when oil traded between $70 and $80, a narrow band that pleased oil producers without hurting consumers too much. The latest surge seems to have been prompted by rising confidence in a global economic recovery, even if most traders and bankers are still cautious about supply and demand fundamentals.

Worries about the Greek economy have pegged prices back over the last couple of days but the more bullish Wall Street banks see prices climbing further, with Barclays Capital forecasting $97, Goldman Sachs $110 and Morgan Stanley $100 next year. But the higher prices go, the deeper the concerns that they will stifle global growth. Jeff Rubin, a former CIBC chief economist and author of a book on oil and globalisation, says: “Triple-digit oil prices are going to threaten a world recovery.”

Kevin Drum lists higher oil prices [2]as one of the ten reasons to be pessimistic about an economic recovery. Some analysts, however, have less concern. Hussein Allidina, a commodity strategist at Morgan Stanley, believes [1]that triple-digit oil prices would undoubtedly slow an economic recovery but not “derail” it.  James Hamilton, a professor of economics at the University of California, San Diego says [3], “Changes of this size can certainly provide a measurable drag or boost to consumer spending, but are not enough by themselves to cause a recession.”

The price of oil is  just one of many variables that can help or hurt the economy, but the consensus is rising prices will inflict economic pain. Yet Congress and the Obama administration have more interest in raising energy prices than increasing supply to lower them. The president’s phantom offshore drilling announcement in effect closes more than opens opportunities for oil and gas exploration. Carbon dioxide regulations proposed by Members of Congress and the Environmental Protection Agency would put upward pressure on oil prices. A Harvard’s Belfer Center for Science and International Affairs study [4]found that gasoline prices would need to hit seven dollars a gallon to meet the administration’s carbon cuts in the transportation sector.

Higher gas prices lower employment, income, and spending, and Americans will have to dip into their savings to pay for higher gas prices. Heritage economist Karen Campbell details these effects in her paper [5], “How Rising Gas Prices Hurt American Households.” Her paper shows that if gasoline prices were to increase by two dollars per gallon [6]over the course of a year, employment would fall by 2.1 million jobs. Whether you are bullish or bearish on the prospects of an economic recovery, one thing’s for certain: action to curb CO2 emissions and thus raise energy prices won’t help.


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URL to article: http://blog.heritage.org/2010/04/12/31153/

URLs in this post:

[1] Financial Times: http://www.ft.com/cms/s/0/28f1e2a6-432e-11df-9046-00144feab49a.html

[2] lists higher oil prices : http://motherjones.com/kevin-drum/2010/04/so-hows-economy-doing-anyway

[3] says: http://www.mrswing.com/articles/Do_rising_oil_prices_threaten_the_economic_recover.html

[4] study : http://www.foundry.org/2010/03/03/7-a-gallon-gas-needed-to-meet-government%E2%80%99s-co2-cuts/

[5] these effects in her paper: http://www.heritage.org/Research/Reports/2008/07/How-Rising-Gas-Prices-Hurt-American-Households#_ftn1

[6] were to increase by two dollars per gallon : http://www.heritage.org/Research/Reports/2008/07/~/media/Images/Reports/2008/bg2162/B2162_Chart2.ashx

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