Oil prices edging downward bodes well for U.S. economy

April 13, 2012

Oil markets appear to have stabilized in recent days, thanks to a boost in output from Saudi Arabia and other crude producers, according to two new reports.

Assuming those trends continue — and no unpleasant surprises emerge — that could ease pressure on world oil prices and provide a boost to the U.S. economy in the coming months.

On Thursday, a report from the International Energy Agency found that global oil supplies have become less constrained in the past few weeks, even as U.S. and E.U. sanctions on Iran are pushing that country’s crude off the market. A report from the U.S. Energy Department released Tuesday came to a similar conclusion: oil markets are loosening, even though sanctions are expected to cause a 15 percent drop in Iranian production this year.

“The cycle of repeatedly tightening fundamentals, evident since 2009, has been broken for now,” the IEA said in its monthly oil report for April.

Crude prices in New York ended at $102.83 per barrel Friday, capping oil’s fifth weekly decline since February. Oil futures dropped earlier in the day on reports of slowing growth in China, the world’s second-largest oil consumer.

Although it’s too soon to say whether this trend will continue — a bit of tension in the Middle East could easily jolt prices back upward — a calmer oil market would mean good news for the U.S. economy.

Some analysts are now predicting that U.S. gasoline prices may be heading downward for the summer months, after having hit a record national-average high of $3.94 per gallon last week. According to AAA’s Daily Fuel Gauge Report, gas prices slid slightly to a $3.90-per-gallon national average Friday.

Assuming that trend continued, “that could be a really big story in helping the U.S. economy in the second and third quarters of the year,” said Chris Varvares, president of Macroeconomic Advisers.

Currently, Macroeconomic Advisers is projecting that the U.S. economy will expand at a 2.6 percent pace this year. But a $10 decline in the price of oil, the firm notes, could provide a 0.2-percentage-point boost to the gross domestic product

Plenty of key industries would benefit from lower prices. Many car-industry analysts, for example, have been encouraged by the strong U.S. auto sales in March. But they warn that if gasoline prices stayed high, those sales could drop in the months ahead as consumers put off new vehicle purchases.

“If gas prices were to keep rising, that would eventually cut into overall sales,” said Sean McAlinden, an economist for the Center for Automotive Research.

Of course, even if the oil market stabilizes, prices will remain relatively high by historical levels: Adjusted for inflation, crude prices are higher than they were during the oil shocks in the 1970s.

But there are some signs that the U.S. economy is slowly adapting. James Hamilton, an oil expert at the University of California at San Diego, has long argued that oil prices mainly only cause serious economic harm when they reach new peaks. When that happens, consumers tend to get nervous and put off buying automobiles and other goods. Yet if oil prices are merely returning to previously highs — as is the case right now — then the impact is blunted.

Still, Hamilton’s research also suggests that drops in the price of oil have only modest effects. “One very well-established observation,” he has written, “is that although oil price increases were often associated with economic recessions, oil price decreases did not bring about corresponding economic booms.”

In other words, stable oil prices may not juice the economy very much, but the United States can at least avoid further damage.

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