Rising cost of oil threatens vulnerable economy

At some unknown price point, say economists, higher oil prices should eventually begin to curb economic growth — or possibly drag the U.S. into a recession. Even after adjusting for inflation, prices are nearing the record level set in the 1970s.

Most analysts acknowledge there is a “tipping point” where high oil prices would knock the eocnomy into recession, but there is little agreement on where that point lies. A lot depends on how well consumers, who account for roughly 70 percent of U.S. economic activity, hold up under the increased price pressure at the pump.

So far, the run-up in oil prices doesn’t appear to have done much damage to the U.S. economy, at least according to the most recent statistics. The government's initial tally showed third-quarter gross domestic product growing at an annual pace of nearly 4 percent; figures showing strong job growth in October seemed to confirm that the economy is still on track.

“I think the higher gas prices are likely to crimp consumer spending to some extent, but people have been waiting for the demise of the consumer for a long time, and it just never happens,” said Julia Coronado, senior economist at Barclays Capital. “The key to the consumer has always been and continues to be the labor market, and the latest reading on the labor market shows that income is growing quite nicely, and there are still jobs being added.”

Economists have several explanations for why the surge in oil prices has dampened growth.

One big reason is that its take a lot less oil to produce each dollar of GDP than it did 30 years ago, the last time the U.S. faced runaway crude prices. More people today make their living sitting behind a computer screen with relatively low energy demands, while the role of energy-intensive industries like manufacturing has declined.

As oil prices have risen, consumers are using it more efficiently. Despite stalled gains in U.S. auto mileage, new buildings and appliances are more energy efficient. Electric power producers have turned to other fuels like coal and natural gas. Overall, U.S. oil consumption flattened out at a little over 20 million barrels per day over the past five years — and even dipped slightly last year — as the economy continued to grow.

For the moment, those efficiency gains are helping the economy keep a lid on the spillover impact of higher oil costs on the prices of goods and services. As oil prices neared the $100-a- barrel mark Wednesday, the government reported that business productivity rose by 4.9 percent in the third quarter, more than double the 2.2 percent gains in the second quarter.

But oil prices aren’t the only cloud on the economic horizon. The ongoing slump in housing, along with continued uncertainty about rising mortgage default and foreclosures, could have a more serious impact. Most U.S. recessions since World War II have been lead by housing downturns, and the current slump is the deepest in decades. If the housing market continues to worsen, higher energy prices would only add to the headwinds faced U.S. businesses and consumers.

   

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