Oil price spike has wide economic impact

The surge in oil prices could force the Fed to reverse course and begin raising rates — before the benefits of those rate cuts have had time to take hold. Minutes of the Fed's April policy meeting, released Wednesday, indicated that the central bank could start raising rates in the fall.

The biggest concern is the potential impact on consumer spending, which accounts for about 70 percent of U.S. economic activity. Consumers have already been hit by the slump in housing prices — eliminating the equity "piggy bank" that many homeowners tapped as prices were rising. Home prices fell 3.1 percent in the first quarter of 2008 compared with last year, according to data released Thursday by the government’s Office of Federal Housing Enterprise Oversight.

Another widely followed reading, the Standard & Poor’s/Case-Shiller index, has shown even larger declines for major U.S. metropolitan areas.

Rising gasoline prices are one more burden on consumers. Economists estimate that every additional penny at the pump takes roughly $1 billion out of overall spending. Taxpayers getting rebate checks designed to revive spending and get the economy moving again have already spent much of that bonus to gas up their vehicles.

So far, there seems to be enough oil and gasoline to go around: Refineries are still adequately supplied with crude, and gas stations aren’t running out of fuel.

Prices are surging as  traders see an increased risk of that happening. But that so-called panic buying could quickly reverse, sending oil prices sharply lower.

“This is all about psychology, and we are not very good at oil companies about forecasting the  psychology of prices," Jeroen van der Veer, CEO of global giant Royal Dutch/Shell, said on CNBC Thursday. “So we'd better prepare ourselves for more volatility because if this is psychology, it can change very quickly.”

The spike in oil prices also has brought calls for government action, despite the limited short-term impact those responses could have. The Department of Energy has suspended purchases of oil for the Strategic Petroleum Reserve.

But Energy Secretary Samuel Bodman said Thursday he did not support the idea of selling oil from the reserves to try to drive down oil prices.

The petroleum reserve "is meant to deal with ... the physical interruption of the flow of oil to our country. We don't have that issue today," Bodman told a House hearing.

The last such move came in September 2005, when the U.S. released millions of barrels of oil from its reserves as part of a coordinated effort by the International Energy Agency to head off possible shortages. But the amount conrolled by the United States is a relative drop in the global barrel and would likely have little impact on market prices.

The price surge has also revived debate on U.S. energy policy. Some longer-term proposals that have failed to win the support of the majority in Congress, like opening up new areas of the U.S. for oil drilling, may now get another look.

“We have to expand domestic exploration, we have to add additional new refineries, we have to add nuclear power into our electricity grid portfolio, we have give rewards for conserving energy and have to  continue to invest in research  and development,” Rep. Adam Putnam, R- Fla., said Thursday. “We have to have an ‘all of the above’ energy policy.”

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