Oil at $100 a barrel unlikely to shake US consumers

Published Thursday, January 03, 2008

By Agencies

With oil having briefly touched the once unfathomable price of $100 a barrel, consumers can expect the cost of filling their gas tanks, heating their homes - in fact, the price of most everything - to also keep rising.

Still, analysts do not expect record-high prices by themselves to send the US economy into recession, simply because expensive as oil is, energy doesn’t consume as big a chunk of Americans’ budget as it did decades ago.

“So far, consumers have done an amazing job of ignoring high oil prices, not to mention falling home prices,” said David Wyss, chief economist at Standard & Poor’s.

A barrel of light, sweet crude reached triple digits for the first time Wednesday, soaring 44 per cent since August and 57 per cent since the end of 2006. Meanwhile, gasoline prices at the pump reached a national average of $3.05 a gallon (80 cents a litre), according to AAA and the Oil Price Information Service. That’s below their May peak of $3.23 a gallon (85 cents a litre) but likely to go higher as the spring and summer approach.

Rising energy prices were cited as a contributing factor in disappointing sales for the just-ended holiday season, along with the continuing slump in housing and an overall uneasiness about the economy. But economists say that generally, the jump in oil is less devastating than previous spikes because incomes have risen faster than energy costs.

“The percentage (of personal income spent on energy) was far higher in 1979-80 than it is now,” said Kay Smith, a macroeconomist at the Energy Information Administration.

In 1981, 14 per cent to 15 per cent of the US gross domestic product was spent on energy, according to Lester Lave, professor of economics at Carnegie Mellon University’s Tepper School of Business. That’s fallen to 7 per cent today.

In part, that is because energy efficiency has increased.

“It’s just not (as) important to the economy anymore,” Lave said. “Prices are not high enough so that they’re going to get middle-income people to change their behaviour.”

Still, that could change if prices keep rising. The question is at what point do prices start to truly hurt.

Lower-income families feel the effects of price increases most dramatically. With heating oil costs expected to jump 33 per cent this winter, according to the Energy Department, families who rely on heating oil will have less money to spend on other things.

Oil’s march higher is expected to have more of an impact in the months ahead. For example, the chief financial officer of United Airlines owner UAL Corp. recently said airlines would have to keep raising fares or reduce capacity to compensate for rising fuel charges. Several carriers have announced new fuel surcharges in recent weeks.

Many consumers have found ways to cope with higher energy costs, relying more on public transportation and lowering thermostats at home.

Some analysts predict oil will continue to rise in the futures market, and if that’s the case, $100 crude might sow the seeds of its own destruction. Many analysts believe higher prices will hurt demand, eventually.

“We think it important to keep in mind that all of the economic consequences of $100 crude are bearish, not bullish” for prices, Tim Evans, an analyst at Citigroup Inc. in New York, wrote in a recent research note.

Oil prices have risen in recent years as booming economies in China and India have grown exponentially and fed the perceptions that global crude supplies are not rising fast enough to meet demand.

Political problems and labour strife in oil-producing areas have also fed oil’s upward momentum. In Nigeria, political upheaval has cut oil supplies from Africa’s biggest producer by 587,000 barrels a day since the end of 2005, according to Energy Information Administration estimates. Renewed violence in Nigeria helped send crude to $100 Wednesday.

Any news about Iran’s disputes with the West and conflict between Turkish armed forces and Kurdish rebels in northern Iraq has also sent crude soaring.

However, oil has also been pushed higher by speculators, who have come to see oil as an investment play as the dollar has weakened in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are also more attractive to foreign investors when the greenback is falling.

That has some analysts concerned that shift in speculators’ strategy could just as easily send oil prices tumbling.

“We are still leaving open the possibility of a major price downdraft prior to month’s end,” said Jim Ritterbusch, president
of Ritterbusch and Associates in Galena, Illinois, in a Wednesday research note. (AP)

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The page was last updated on: 14 January 2016 17:13