Tuesday, April 6, 2010

Will Energy Prices Derail the Expansion?

From the Houston Chronicle:

More signs the economic recovery is taking hold sent oil prices to an 18-month high Monday but also stoked concerns that rising energy costs could put the brakes on the rebound just as it's getting started.

The jump in crude prices was attributed to encouraging reports on job growth Friday and on manufacturing and services activity Monday, when traders had a first chance to pounce on the news after markets were closed for the Good Friday holiday.

But some analysts warned that investors, in their haste to bet on the recovery, could push oil prices so high that consumers pull back on energy use and perhaps on other spending to compensate for energy's harder hit to their budgets.

“People really believe that when the U.S. recovers, U.S. oil demand is going to blow through the roof. And, quite frankly, at $85 a barrel, that's nonsense,” said Ken Medlock, an energy studies fellow at Rice University's Baker Institute.

Higher gasoline prices that come with rising crude costs could push Americans to drive less, and also to buy smaller cars, take fewer vacations and eat out less often, he said. “There's all sorts of ripple effects that high oil prices carry with them.”

On Monday, crude rose $1.75 to settle at $86.62 a barrel on the New York Mercantile Exchange, after making sizable gains last week as well. The price marked the highest close for crude since $88.95 a barrel on Oct. 8, 2008.


U.S. gasoline demand dropped sharply following a spike in pump prices to $4.11 a gallon in July 2008 and remained sluggish in 2009 amid the recession. With the recovery still so fragile, the worry is that $3 gasoline right now could keep the economy in neutral.

First, note the economic numbers have bee getting better and better.

That means higher oil prices could be a problem once they get to a certain, undefined level. Last week I was filling up my tank and noticed that prices were $2.99/gallon. I was a bit surprised. But, given where oil's price currently is, it's to be expected.

If there is one thing that could really kill the expansion quickly, it's oil prices.