by William Neikirk
The price of oil is approaching $100 a barrel, an important psychological barrier for Americans already hard hit by higher energy prices and the threat of a housing-induced economic slowdown.
Even though headlines will scream, markets will get nervous, and politicians will blame each other, the real economic impact of a triple-digit price for petroleum is uncertain. It depends on whether the price is temporary or it continues to surge upward, analysts said.
But $100-a-barrel oil and possible higher gasoline prices would come at a bad time for the U.S. economy. As an economic force, analysts said, higher oil prices alone would not be enough to cause severe economic damage.
Yet on top of other major economic concerns -- a brutal housing correction, troubled financial markets and hard-hit banks -- they could be the catalyst for a possible recession.
See the rest of the story in today's Tribune:
To energy experts such as Mary Novak of Global Insight, a Boston-based economic consulting firm, the price of oil could hit $100 a barrel before long but is likely to fall back after that. She said the high price of oil over much of the past year has been driven by speculators and by geopolitical concerns, such as U.S. clashes with Iran, and not as much by market conditions. If she is right, any damage would be minimal.
But to Phil Verleger, an energy economist in Aspen, Colo., the price of oil could stay high through much of the winter and then a hot summer in 2008 could cause gasoline prices to rise as high as $4.50 a gallon in most places across the country. That scenario would not be good for the economy and for incumbent politicians in an election year.
Less dependence on oil
So far, the surging price of oil -- at a record $95.93 a barrel on Friday -- has affected the economy only marginally. That's because the U.S. and the rest of the world are less dependent on oil. "We basically use oil for transportation, and a small amount is used in other sectors," said Novak, Global Insight's managing director of energy services. "While significant, it is not a big drain on our economy."
But clearly it could be a big drain if it causes the price of gasoline to surge. Joel Naroff, an economic consultant in Holland, Pa., said the worst-case scenario is if the price of oil stayed in the $90-to-$100-a-barrel range, causing gasoline prices to rise at the start of next year's driving season. As summer demand picked up, he said, gasoline prices could head higher.
"Prices of all energy sources would really skyrocket," Naroff said. "That would cause a slowdown in consumer spending at the same time prices are going up. If consumers are looking at $4 a gallon gasoline, they wouldn't have a lot left in their pockets to spend."
That is also Verleger's biggest worry. The U.S. may escape such a surge in the price of oil and gasoline, he said, but he added that "the conditions for another doubling of the price of oil are in place."
He cited strong economic growth in Asia, a lack of investment in oil production and "a lack of real serious efforts to reduce consumption."
"While it might be a big psychological thing for oil to hit $100, the first concern is where the top is," Naroff said. "The second concern is how long it stays there."
If oil tops out at $105 a barrel and falls swiftly to $65 a barrel, he said, there is not as much cause for concern as if it topped $100 and then fell to $95 a barrel for months.
Gasoline prices rising
At the pump, gasoline prices have reached a national average of $2.942 a gallon, according to AAA and the Oil Price Information Service. Gas prices have risen nearly 19 cents since mid-October, The Associated Press said.
If Novak is right and the price of oil plunges in the next several months as speculation eases, then the outlook is for little or no damage on the U.S. economy. According to Novak, higher oil prices are not likely to sink the economy alone "until you have a second impact. And the second shoe fell when the 'subprime' mortgage market sort of broke open in August."
David Wyss, chief economist at Standard & Poor's, the credit-rating firm, said if the winter is unusually cold, home heating oil prices could surge in the Northeast and that could have ripple effects on spending and the economy. Wyss said $100-a-barrel oil by itself is not so frightening. "It matters, but it's not the end of the world," he said. "The country isn't as dependent on oil as it used to be. ... What counts for consumer is really the price of gasoline. Americans don't buy crude [oil]."
And if its price stays at $90 a barrel for much longer, he said, gasoline prices are likely to go up soon.
Even if Congress passes an energy bill calling for more energy efficiency and higher fuel economy requirements, the impact will be more long term and likely would not immediately affect the price of gasoline or oil, Novak said.
"The bill has no teeth in it," said Wyss. Should the measure raise fuel economy standards, he said, "it takes 10 years to replace the cars" that are less efficient.
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Comments
More fuel efficient cars aren't going to solve any problems. If we were able to build cars that get 100 miles/ per gallon, and the oil producing nations would consequently sell less crude, the price of gasoline would simply increase 4 times while less gasoline or crude oil is being used. Think about it.
Posted by: Hans Pfeiffer | November 3, 2007 10:32 AM
I really don't see how oil can stay up this high for much longer...more and more now, it really does look like there is an oil bubble, that is driven more by rampant speculation among commodities traders than by any real market force.
OPEC is still pumping oil, and they still have lots of oil left to pump - so does the United States...If traders were smart, they would start to go heavy on their short positions, because as soon as some of these tensions start to easy up (and they will), oil will likely begin a dramatic fall back to $60/barrell, which without all of these regional tensions should be the price.
Posted by: EK | November 3, 2007 10:40 AM
Mr. Neikirk raises again the spectre of recession. However, the facts are these: In spite of the increased barrel price of oil, pump prices are stable or less than in the past; American consumption of gasoline is at an alltime high, 9.472 million barrels per day, so the price is not deterring use; and finally, consumer spending was up significantly in the third quarter, indicating that oil prices are not a deleterious determinant in the buying practices of people. There are enough people in the media raising the red flag of recession for the past four years and still the economy rolls. The media will not report the "robust" economy until a Democrat is elected president and then, with the same results, everything will be hunky dorey. Give it a rest.
Posted by: James C. | November 3, 2007 10:48 AM
"More fuel efficient cars aren't going to solve any problems.'
...except for a lot less air pollution.
Posted by: C.Morris | November 3, 2007 11:21 AM
"If we were able to build cars that get 100 miles/ per gallon, and the oil producing nations would consequently sell less crude, the price of gasoline would simply increase 4 times while less gasoline or crude oil is being used. Think about it.
Posted by: Hans Pfeiffer | November 3, 2007 10:32 AM"
You are turning supply and demand on it's head.
Demand goes down, prices fall.
Posted by: C.Morris | November 3, 2007 11:43 AM
Never question T. Boone Pickens!!!
Posted by: Logic Prisoner | November 3, 2007 12:01 PM
I agree that fuel efficiency req's should be increased. But our do nothing congress has refused to put any teeth into the new bill.
So what if oil ultimately goes down to $60...how bout a little pro-active action here?
Posted by: db | November 3, 2007 12:03 PM
Don't worry, according to John D, we are in an economy expansion. . .
Besides, if you don't want to pay for high gas price then don't drive. That's what we've been told by the oil industries.
I've cut my traveling by %50. Haven't flown on a flight in two years. I'm doing my part. Everyone needs to do their part. Go to your local parks instead of Florida or Bahamas because that's what the oil industries are telling us.
Posted by: Lou | November 3, 2007 12:06 PM
Experts have been predicting $100/barrel oil for years. And our so-called leaders have done absolutely nothing.
With the growth of demand for oil in the population centers of China and the subcontinent, it is hard to see the price coming down very far.
Besides, we'll soon be talking about 100 Euro a barrel, since the oil producing countries are planning to switch currencies.
Posted by: athena | November 3, 2007 12:30 PM
There are 2 types of inflation. In the 70s fuel prices rose because the supply was cut. This time it's because demand is increasing. The world is consuming energy for a benefit.
The price per mile traveled and therefore benefit recieved versus man-hours in the US is still much better than in the 70s. Transportation deregulation was the only smart thing Jimmy Carter did. BTW it was less popular than outsourcing is today. Efficiency is the world wide answer.
Posted by: whatnow | November 3, 2007 12:58 PM
I remember not too long ago when oil was around $50 a barrel. Back then, all the pundits said alternative energy projects weren't 'cost effective' unless and until oil passed $65 a barrel.
So where exactly ARE all of those alternative energy programs now that oil has topped $90 and is closing in on $100 a barrel?
Posted by: RegularGuy | November 3, 2007 1:14 PM
Lou, you need a job and income to be able to travel. Please explain how not flying in two years helps? So, under your "reasoning" no one should fly, which puts the airlines out of business, which puts people out of work, which then closes the hotels, which puts people out of work, which then puts taxi and bus drivers out of work, convention people out of work, restaurant workers out of work, which then puts accountants out of work.
I see, you want everyone out of work! That truly is the Loony Left plan: no on works!
And, yes, Lou, the economy IS EXPANDING. It just grew by 3.8 percent in the third quarter. No quarter has been in negative since the 4Q of 2001. Jobs have been created for 50 straight months.
Would I like lower gas prices? Most definitely.
Do you need a comprehensive energy and conservation program? Most definitely.
Is your "reasoning" common sense? Heck no!
Posted by: John D | November 3, 2007 1:35 PM
The Breaking Point
By Peter Mass
NYT Mag (yes i know)
August 21,2005
http://www.petermaass.com/core.cfm?p=1&mag=124&magtype=1
" The onset of triple-digit prices might seem a blessing for the Saudis — they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis — and about OPEC in general — is that high prices, no matter how high, are to their benefit.
Although oil costing more than $60 a barrel hasn’t caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything — from gasoline to jet fuel to plastics and fertilizers — and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash. Saudi Arabia and the other members of OPEC entered crisis mode back then; adjusted for inflation, oil was at its lowest price since the cartel’s creation, threatening to feed unrest among the ranks of jobless citizens in OPEC states.
‘‘The Saudis are very happy with oil at $55 per barrel, but they’re also nervous,’’ a Western diplomat in Riyadh told me in May, referring to the price that prevailed then. (Like all the diplomats I spoke to, he insisted on speaking anonymously because of the sensitivities of relations with Saudi Arabia.) ‘‘They don’t know where this magic line has moved to. Is it now $65? Is it $75? Is it $80? They don’t want to find out, because if you did have oil move that far north . . . the chain reaction can come back to a price collapse again.’’
High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel from natural gas or coal, become economically viable as the going rate for a barrel rises past, say, $40 or more, especially if consuming governments choose to offer their own incentives or subsidies. So even if high prices don’t cause a recession, the Saudis risk losing market share to rivals into whose nonfundamentalist hands Americans would much prefer to channel their energy dollars. A concerted push for greater energy conservation in the United States, which consumes one-quarter of the world’s oil (mostly to fuel our cars, as gasoline), would hurt producing nations, too. Basically, any significant reduction in the demand for oil would be ruinous for OPEC members, who have little to offer the world but oil; if a substitute can be found, their future is bleak. Another Western diplomat explained the problem facing the Saudis: ‘‘You want to have the price as high as possible without sending the consuming nations into a recession and at the same time not have the price so high that it encourages alternative technologies.’’ "
We don't skip a flight now we will be forced to skip a flight later (cost of living goes up when prices go up). At the same time high gas prices make alternative energy more affordable and possible.
Posted by: lio | November 3, 2007 3:03 PM
Exactly what Bush and Cheney want. Mission accomplished.
Posted by: Rick/Sneads Ferry, NC | November 3, 2007 3:36 PM
Why is it that the more gas prices go up, the more traffic there seems to be?
Too bad the CTA is tanking. We could sure use a good public transit system about now. However, here in Hawaii you can get a monthly bus pass for $40 and get just about anywhere, yet there are still horrendous traffic jams.
It's time we paid the real price for the black stuff out of the ground.
Posted by: DD | November 3, 2007 3:41 PM
Now will you quit buying gas guzzling SUV"S and trucks? What is it going to take? You people are your own worst enemy!
Posted by: billp | November 3, 2007 3:49 PM
Peak oil is a reality www.lifeafterthecrash.net go read up on it
My biggest fear is hyperinflation and peak oil
Posted by: Stockmania | November 3, 2007 5:15 PM
It's gonna get worse before, or if, it gets better.
Posted by: toldyouso | November 3, 2007 6:14 PM
whatnow:
I agree with you in principle, although I balk at some of your terminology. Furthermore, I don't believe you give a complete explanation for the phenomenon of rising oil prices that we now see.
First, where we differ in terminology is in your use of “price increases” to define inflation. Inflation occurs whenever the money supply is larger than the demand for it to represent the totality of goods and services within a given economy. The increase of prices is only a symptom of inflation, and not inflation itself. Prices rise as a result of inflation because the fractional value of each unit of currency, in relation to the entire economy, has less value. When money has less value, more of it is demanded to draw a product in the market – and, hence, a rise in prices ensues. We sometimes forget that money is, itself, an exchange commodity which also works by the rules of supply and demand.
Second, the change in supply and demand of foreign fuel oil is not the only cause for its rise in price. Recalling, again, that money is the exchange commodity used to purchase fuel oil, we must give due regard to the change in value of money in the equation. The fact is, our money has been losing value as a result of its overproduction in relation to the total value of the economy. That is demonstrated, in part, by the fact that our currency has been falling in value in every currency market in the world. Even the Canadian Dollar is today worth slightly more than the U.S. Dollar (1 CAD = 1.06980 USD), whereas, for much of the prior three or four decades, the Canadian Dollar was worth approximately $ 0.80 U.S.
The sad truth is that our money is getting eaten from the inside out by the inflation causing practices of the Federal Reserve Bank and the federal government. The price of oil has jumped twice in recent history – and each jump occurred the same day the Federal Reserve lowered its lending rates. Why? Because a reduction in lending rates leads to the expansion of credit, and credit is an artificial method of creating more money in a market than needed to represent the totality of goods and services therein. Remember that banks are allowed, under fractional reserve banking rules, to lend more money than they have on deposit. The market responds adversely to the expansion of credit because it leads to the loss in value of the dollar over time, requiring more dollars to represent the same buying power. Consequently, the market adjusts prices upward to insure that the same value is given for a commodity.
Similarly, our government’s love for running up the debt has substantially added to inflation. The issuance of bonds is the primary method of paying for the debt that we have accrued. This practice leads to an increased money supply, especially when the Federal Reserve gets into the act and starts buying these bonds and converting them into a basis for lending. Ten (10) trillion dollars worth of bonds, as has been necessary to issue to cover the debt, is a lot of paper to have outstanding. That represents almost an entire year’s GNP (the yearly GNP being about $12.5 trillion). Paying the debt service on these bonds, alone, consumes nearly 10% of the federal government’s yearly budget. I don’t suppose I have to tell you that some healthy, managed “deflation” might occur if we retired a substantial amount of this debt without running it up again.
In short, we cannot ignore the effect of governmental inflationary practices on the price of foreign fuel oil. Increase in demand and/or a decrease in production may cause an increase in price on one end of the equation, but the dollar’s loss of value is responsible for the rise in price at the other end.
Posted by: John W. | November 3, 2007 6:28 PM
I once sat at a table with a group of gentlemen and the discussion was about how, in the 70s or 80s, some people invented engines-- valves--something mechanical--that would have given autos a very high MPG. However, many of those inventors had "accidents" and died--and the gas saving devices died with them. Maybe, soon, the oil corps will discover, or invent these devices, again, and be kind enough to sell them to us--at a good price--a price that would help us out of the high dollar/barrel oil "predicament". The sale of the patented devices would, of course, have to help the oil corps. retain record profits.
Posted by: Vivian | November 3, 2007 9:20 PM
Don't lay all the blame on
the Saudis. The Brokers and traders are bidding-up
the crude oil futures price. Recall 2 weeks ago
when oil was at $ 92.00
a barrel the price of
gasoline was $ 2.87 a gallon. Now that oil 1s
approaching $ 96.00 a barrel, gasoline rose seemingly overnight to $ 3.19 a gallon, a whooping
32 cent increase. These
prices are being artificially manipulated.
Posted by: Marion Mims | November 3, 2007 10:36 PM
Don't lay all the blame on
the Saudis. The Brokers and traders are bidding-up
the crude oil futures price. Recall 2 weeks ago
when oil was at $ 92.00
a barrel the price of
gasoline was $ 2.87 a gallon. Now that oil 1s
approaching $ 96.00 a barrel, gasoline rose seemingly overnight to $ 3.19 a gallon, a whooping
32 cent increase. These
prices are being artificially manipulated.
Posted by: Marion Mims | November 3, 2007 10:36 PM
What I would really like to know is, how do the oil analyist and the federal governments Enery Admistration keep being so far apart on thier weekly inventory reports. The analyist predicts a 200 thousand increase, but the government says a 2.4 million decrease. I really think that the Energy Admin needs to be audited
Posted by: Boatright | November 3, 2007 10:59 PM
"Never question T. Boone Pickens!!!
Posted by: Logic Prisoner | November 3, 2007 12:01 PM"
funny stuff.
Posted by: C.Morris | November 3, 2007 11:04 PM
IDIOTS, it's not the cost of crude oil. It is the cost of everything that is affected by the cost of crude oil and that is EVERYTHING! Have none of the posters on this blog purchased any food lately? We are financing the very countries that want to KILL us! The traitorous parasites in New Yuk that have driven these prices should be prosecuted for treason and hanged! The unparalleled greed that is threatening to destroy our way of life must be stopped!
Posted by: Bill | November 3, 2007 11:16 PM
"IDIOTS, it's not the cost of crude oil. It is the cost of everything that is affected by the cost of crude oil "
...we get that part, Bill
Posted by: C.Morris | November 4, 2007 9:44 AM
Though I can't agree with the tone in which Mr. Morris objects; I agree with his underlying point. Crude Oil affects everything eventually and will until it becomes economically unviable.
We are fast approaching that point. The age of the fossil fuel is nearing an end, and though the process will be painful, eventually we will get past this and hopefully be a better world in the end.
For me, oil and gas prices can't go high enough.
Posted by: G. Ponto | November 4, 2007 10:52 AM
The energy industry has molded US national policy since Cheney/Bush took the WH. It has been reported that Bush was in office for only two weeks when he created the task force of National Energy Policy Development Group (NEPDG). Alas, Cheney was chairman. The group (comprised of energy interests) was suppose to design an energy policy for BushCo--US citizens--, and, the group meetings were held in secrecy--with no sunshine, no counterpoint. These meetings are now termed the Cheney Energy Task Force meetings. Energy CEOs contributed much money to the Cheney/Bush campaign. I think that the energy policy that Cheney's task force arrived at was called Invade Iraq- then enjoy all the 'benefits' that ooze from the war to push energy prices up and reap record profits.
Posted by: Vivian | November 4, 2007 10:56 AM
G Ponto,
I was "Quoting" 'Bill'.
It wasn't my tone.
Posted by: C.Morris | November 4, 2007 3:22 PM
Sure hope E85 gets more popular in all the United States of America now. I think ethanol is a great alternative fuel that America can completely control without any foreign countries getting a share of our money.
Posted by: AZtraveler | November 5, 2007 12:34 AM
Mr Ponto. What do you propose using for energy to heat and cool your home and get you to work every day? I would guess that you are employed and do not live in a cardboard box in an alley? I suppose you are opposed to coal of which we have enough in the US to provide fuels for several hundred years, ohhh wait, that pesky CO2 will kill us all. My suggestion is to allow everyone to breath in as much as they please, just don't exhale, the politicians and corporate types will probably propose an exhalation tax. That will solve the problem posthaste, IDIOTS!
Posted by: BIll | November 6, 2007 12:49 AM
Just a comment on a few people that mentioned alternative fuels. E85 is a farce. You burn more of it per mile then gasoline. I don't see it being any cheaper then gas. Further more it has driven the price of corn so high that you can't afford to feed your livestock and has anyone bought any meat lately? WOW! The alternatives are just as costly! As for using water for biofuel, here were I live Water Management owns all that. Has anyone bought a bottle of water lately? It all boils down to pure greed folks! We can argue all we want, when alternative fuels are being used we still will be having the same discussions. It will just be our own government cutting our throats and not the oil industries.
Posted by: Michele | November 7, 2007 10:03 AM