Surviving the coming meltdown....... Apr 23, 2005 11:19:39 GMT -5
Post by Moses on Apr 23, 2005 11:19:39 GMT -5
April 23, 2005
Oil's Lesser Role in U.S. Economy Limits Damage From High Prices
By JAD MOUAWAD
[Not long ago, the notion that crude oil prices would ever reach $50 a barrel, much less surpass that, was a distant prospect. Some economists darkly predicted that sky-high oil prices would send the American economy into a recession, drive companies out of business and bring back both inflation and angry fuel lines.
Investors seem to have turned to this idea lately, reflecting a general uncertainty over the course of the economy. On Wednesday, they pushed stocks to their lowest point since October, in part because of worries that higher energy costs would crimp corporate earnings and stoke inflation.
But even as prices cling above $50 a barrel, those fears have proved to be exaggerated. So far, the economy has weathered the price increase with remarkable ease and there is reason to believe that high fuel costs do not have quite the impact they once did.
The reason is that oil has been knocked off center stage in the American economy. The decline in manufacturing and the rise in service-oriented jobs means oil is not as indispensable for economic growth. Manufacturers and electricity-generating plants, once among the biggest users of oil, now depend primarily on natural gas, coal and, to a lesser extent, nuclear power.
While the United States does consume more oil today, most of it is for transportation. And even as gasoline prices hover at record levels, the cost, adjusted for inflation, is still well below the peak reached in the early 1980's. Even more important, fuel takes up a smaller share of Americans' income.
This is not to say that the higher gasoline prices are not starting to pinch - or that they will not send the economy for a loop if they go up sharply from these levels. With retail prices expected to reach a nationwide average of $2.35 a gallon this summer as travelers crowd the highways for vacations, the high costs could become more of a burden.
Higher fuel prices have started to 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 less than analysts expected. In another tell-tale sign, consumer confidence declined for a second month in March.
The biggest concern was a fear 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 increase in nearly four years.
But today's economy is more efficient than the one of three decades ago. In the early 1980's, households spent an average 8 percent of their income on energy bills, mainly gasoline and home heating oil. It took 102 minutes of labor for the average worker to pay for gasoline for a 100-mile trip back then, and energy costs accounted for 14 percent of the American economy.
Today, thanks to energy-saving measures set off by the oil shocks of the 1970's and 1980's, most of these numbers have been cut in half, according to David Wyss, the chief economist at Standard & Poor's. Households now spend about 5 percent of their income on their energy bills. It takes 42 minutes of work to pay for a 100-mile trip, and energy costs account for 7 percent of the American economy.
It also takes 55 percent less oil and gas to produce the same amount of gross domestic product today, compared with 1973 even as Americans' income, on average, has doubled.
"Americans seem to be able to bull their way through everything," Mr. Wyss said.
In the fourth quarter of last year, when oil spiked above $55 a barrel for the first time, the economy still expanded 3.8 percent and personal spending rose 4.2 percent. "No matter how high oil prices go, Americans will always find something to spend their money on," Mr. Wyss said.
Still, every penny's increase in petroleum prices adds $3 billion a year in costs for consumers, which translates into a larger trade deficit, higher costs for some goods and lower real income, according to the American Petroleum Institute. For gasoline alone, every penny increase means more than $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 averaged about $20 a barrel throughout the 1990's, started to rise significantly at the beginning of 2003.[start of Iraq war] They reached a high of $58.20 a barrel on the New York Mercantile Exchange on April 4 and traded at $55.39 on Friday.
Some economists argue that since the increase has happened over a longer period of time - 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.
"The increase has proceeded at a relatively gradual pace," said James D. Hamilton, a professor of economics at the University of California, San Diego, "a pace at which the economy has had time to adapt; a pace that hasn't panicked consumers or firms; a pace different from earlier periods when increases came much more suddenly."
High energy costs have also had a lesser effect because they have not led to a widespread inflationary spiral that caused the Federal Reserve to increase interest rates sharply, according to Kenneth Rogoff, a professor of economics at Harvard, who was the chief economist at the International Monetary Fund from 2001 to 2003.
"Oil spikes and interest rate spikes used to come hand in hand and that led to recessions," Mr. Rogoff said. "These days, long-term inflation expectations are much better anchored than they used to be 10 or 15 years ago. When people see a spike in oil prices, they don't immediately infer that we'll see double-digit inflation."
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," Mr. Wyss of Standard & Poor's said. "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."
(In any case, taking inflation into account, prices would have to reach $80 a barrel to match the record of March 1981. Using a similar measure, gasoline would have to rise to $3.12 a gallon to match its 1981 peak.)
Many economists say there is typically a lag before the full effects of an oil shock are felt. Stephen Brown, the director of energy economics for the Federal Reserve Bank of Dallas, estimates that higher energy costs could cut growth from 2004 through 2006 as much as 1.6 percentage points below where it otherwise might have been.
"We're not that far down the road yet," Mr. Brown said. "Some of the impact on the economy is yet to come."
So far, Mr. Brown said, businesses have been reluctant to pass higher fuel costs on to consumers.
While oil has been flushed out of most industries, no real substitute has been found in transportation. Each day, American drivers burn 11 percent of the world's crude oil in the form of gasoline.
The highly visible cost of filling up a gas tank could become a political headache for the Bush administration. Unlike the Clinton administration, which released emergency stocks to quell a spike in prices in 2000, the current administration says it would be a mistake to release strategic reserves to bring prices down.
According to a USA Today/CNN/Gallup poll released April 4, respondents ranked high gas prices below terrorism and health care costs as priorities for the president and Congress. The same poll suggested that about 50 percent of Americans have cut back significantly on the amount of driving they do; more than a third of the respondents said they had reduced their spending significantly because of the higher prices.
Lesli An Orio, 38, a Web site manager for a bank in Charlotte, N.C., is one of those who has reacted strongly to the price increases.
Returning from her honeymoon last April to ever-rising gasoline prices, Mrs. Orio decided to leave her brand-new silver Subaru Outback at home and ride the bus to work. She moved her two young boys to a public school closer to home in January so they would not have to ride 38 miles to their private school in the family's supersize Ford 150 pickup truck.
A year later, Mrs. Orio has grown used to her new routine, which saves her about $368 a month in gasoline costs and another $125 in parking fees. (In addition, she said, her 35- to 45-minute commute now permits her to get ahead on her reading; she recently finished James Michener's thousand-plus-page epic "Hawaii.")
"I will never take my car again," Mrs. Orio said in a telephone interview. "Public transportation in Charlotte is archaic, but I've gotten to enjoy my time on the bus. And the money I save goes to a college fund for the children. I would not have done this if it had not been for high gas prices."