Price Pinch Unlikely to Halt Economic Growth
By Nell Henderson
Washington Post Staff Writer
Friday, June 4, 2004; Page E01
The recent rise in oil prices is likely to throw some sand in the wheels of the U.S. economic recovery this year, but not enough to derail it, economists said this week.
Even with crude oil prices around $40 a barrel, analysts said the recent increases just haven't been big enough to significantly brake a strongly expanding economy that is far less energy-reliant than it was in past decades, when soaring oil prices often preceded recessions.
The forecasts assume no major terrorist disruption of key Saudi Arabian oil fields -- a notable caveat after the attack on foreigners there last weekend. If such an event sent prices skyrocketing to $60 to $70 a barrel, that would have much more damaging effects, depending on how long they would stay that high and how consumers and businesses would respond.
"The momentum of the U.S. economy now is so strong that it would have to be a major oil crisis" to have a big impact, said Nariman Behravesh, chief economist for Global Insight Inc., an economic research firm.
Crude oil prices would have to rise to around $50 a barrel for at least three to six months to qualify as an economic shock comparable to those of the 1970s, Morgan Stanley chief economist Stephen S. Roach said in a recent analysis by the firm's global economic team. After adjusting for inflation, current oil prices are only about half what they were in 1981-82, when they hit their record highs.
Still, the recent rise in oil costs inevitably carves into consumer and business budgets, leaving less money to be spent on other things. If current prices are sustained, that should slow economic growth by about half a percentage point off a pace that is running somewhere above a 4 percent annual rate, many analysts estimate. That slice is worth tens of billions of dollars in an $11 trillion economy.
Higher oil prices are not bad news for every sector of the economy. The beneficiaries obviously include U.S. energy companies and energy-producing states.
The hard-hit, though, include the airline, trucking and petrochemical industries. The U.S. auto industry could suffer if motorists turn from gas-guzzling trucks to less profitable but more fuel-efficient smaller vehicles -- which hasn't happened yet.
The biggest impact to the economy is likely to be measured by how higher gas prices affect other consumer spending, since it accounts for about two-thirds of all U.S. economic activity. But energy costs account for only about 7 percent of all household expenditures, with gasoline less than half of that, according to the Bureau of Labor Statistics. And the price increases are coming at a time when consumer incomes and total spending are rising because of an improving job market.
In the first four months of the year, higher oil prices absorbed about $30 billion from the $120.4 billion increase in households' inflation-adjusted, after-tax income, by some estimates.
The impact on businesses will depend on their oil dependence, profit margins and ability to pass on their costs to customers in the form of price increases.
The airlines, for example, can't fly without jet fuel. They are losing money as an industry and are restrained by fare wars from raising prices. The $7-per-barrel increase in the average price of oil -- to a projected $38 this year from around $31 last year -- will add $3 billion to the carriers' expenses this year, the Air Transport Association told a congressional panel yesterday.
Chemical companies take an extra hit because they use oil both as a fuel and as a raw material for their products while having relatively little power these days to raise prices.
But America's is primarily a service economy, with growth coming increasingly from what Federal Reserve Chairman Alan Greenspan calls "conceptual output," which is less energy-intensive than traditional industries. About 25 years ago, the country's spending on oil was equivalent to 5 percent of gross domestic product, or total economic output; today the amount is equal to about 2.5 percent, or half as much.
Manufacturing companies tend to be among the heavier users, accounting for a fourth of the nation's total energy consumption, according to David M. Huether, chief economist for the National Association of Manufacturers. But with U.S. exports and business investment rising briskly, NAM continues to forecast around 6 percent growth in manufacturing this year, with higher oil prices reducing the outcome by no more than 0.2 percent, Huether said.
"Oil prices are not endangering the manufacturing recovery," Huether said.
Likewise globally, "the impact of higher oil prices naturally varies between countries depending on their oil dependency," according to a recent Credit Suisse First Boston analysis. Net oil exporters, such as Russia, Nigeria and Mexico, will get a boost to growth this year. Net importers in Asia and Europe will see their growth rates slip.
If oil prices are sustained around current levels, they would reduce global growth by about 0.4 percentage point, CSFB estimates.
Countries already growing very slowly are among the most vulnerable. For example, Germany's economy, the largest in Europe, contracted last year and is forecast to grow just 1.5 percent this year.
"High energy prices, for instance current oil prices, obstruct the prospects for economic development worldwide," German Chancellor Gerhard Schroeder said yesterday in a speech to a conference on renewable energy in Bonn, according to Bloomberg News. "They threaten the recovery in the industrialized countries."
© 2004 The Washington Post Company