Diversified Economy Softens Blow of Oil Price Hikes
As crude oil prices roared toward $30 a barrel this week, reaching levels last seen on the brink of the Persian Gulf War, airlines were adding surcharges to ticket prices and consumers were worrying about heating bills.
Yet inflation remains tame and the U.S. economy has barely blinked.
The reason: Oil simply doesn’t lubricate the new, tech-savvy economy the way it once did.
“Oil’s overall impact on the economy is vastly reduced” from years past, said William Cheney, chief economist for John Hancock Financial Services. “That’s due to the increased energy efficiency of companies that use oil heavily and the increased importance of industries that are not heavily dependent on it.”
Oil expenditures, which accounted for 8.5% of gross domestic product in 1981, have fallen to about 3%, the U.S. Energy Information Administration said.
Prices for crude have jumped nearly $5 a barrel in the last week.
Among the consequences: U.S. gasoline prices, which were receding after hitting a 3 1/2-year high of almost $1.35 last month, are rising again; the nation’s top airlines said this week that they are adding a $20 surcharge to round-trip tickets because jet fuel costs have more than doubled in the last year; trucking companies are hiking rates 5% to 6%; and heating oil, spurred also by a Northeastern cold snap, has risen 50% in two weeks.
The end of cheap oil can be traced to March, when the Organization of Petroleum Exporting Countries cut production by 4.3 million barrels a day--representing nearly 6% of global daily demand of about 75 million barrels. The oil producers were determined to end a worldwide glut and push up prices that had fallen to as low as $11.37 a barrel in February.
OPEC, an often undisciplined cartel, was able to hold down production.
U.S. oil supplies are at their lowest level in several years, and the International Energy Agency warned Thursday that markets “are tight and getting tighter.”
Since March, crude prices have more than doubled, reaching a nine-year high in November that was smashed again this week. Oil for February delivery rose as high as $29.95 during trading Thursday before the contract expired. In trading Friday, the March contract briefly rose above $29 before giving up some ground. The new near-term contract still managed to finish the day with a gain of 23 cents to close at $28.20 a barrel on the New York Mercantile Exchange.
Two decades ago, a similarly dramatic spike in oil prices caused gas lines and sent the U.S. economy into shock. But in 1999, while fuel oil and gasoline prices climbed sharply, the “core” rate of inflation--excluding the volatile energy and food sectors--rose at its smallest rate in 34 years, 1.9%.
What happened to inflation? Where’s the recession?
Some economists still warn of dire consequences, especially if oil’s rise continues unabated. Philip K. Verleger Jr., economist for Brattle Group, a consulting firm in Cambridge, Mass., sees oil headed to $40 by year’s end, prompting several interest-rate increases and a recession before the year is out.
“If it went to $40 a barrel, it would be disruptive,” said Bruce Steinberg, chief economist for Merrill Lynch & Co. in New York. “You can’t keep going up endlessly without having an effect.”
But the U.S. has built up a much better resistance to energy shocks. The oil price explosions of the mid- and late 1970s helped spawn a new energy consciousness, and the giant steps taken by technology steered the economy away from manufacturing and toward services and the Internet.
“Oil is still probably the single most important price that affects the well-being of Americans,” economist Cheney said. “When the price goes up . . . America is in a sense a little poorer. But we are much better at adapting to it now.”
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Still Cheaper
Despite the recent spike in crude oil prices, when inflation is taken into account, prices now are still lower than they were in the early ‘80s. Annual price per barrel, both actual and in inflation-adjusted dollars:
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Sources: Bloomberg News, Times research
