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Oil's Recent Rise Not as Familiar as It Looks
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"I can't explain why the price is where it is today," Henry Hubble, Exxon Mobil vice president of investor relations, said Thurday during a press call about the company's earnings. "The market is going to dictate . . . and we're a taker of those prices."
Exxon has a spacious trading floor in Fairfax, Va., where about 80 people trade crude oil and another 80 trade products. But they don't negotiate prices; instead they try to take advantage of oil quality differences, tanker locations and tiny gaps between markets to meet Exxon's refinery needs as cheaply as possible. The final prices are set relative to those on the New York Mercantile Exchange or similar markets on the day of delivery.
One surprise about oil prices: So far, the economy seems to be coping. Despite an average crude oil price of $75 a barrel, the economy grew at a brisk 3.9 percent pace in the third quarter. Unemployment is low, and inflation is modest.
By contrast, the oil price spikes in the 1970s fueled high inflation and weakened growth, a combination known as stagflation.
Improved automobile mileage, more efficient manufacturers and greater reliance on services have made the U.S. economy more resilient. The United States now uses half the energy it did in 1980 for every unit of economic output. Energy costs make up a smaller portion of household budgets than in 1981.
In a recent paper, "Who's Afraid of a Big Bad Oil Shock?" Yale University economics professor William Nordhaus credited smarter monetary policy and better general economic conditions. Moreover, he said, in percentage terms, the oil shocks of the 1970s were much bigger than the steady price increases since 2002.
But Nordhaus wrote before the latest jump in prices, and many economists are wondering how high will be high enough to hurt the broader economy. Since 2000, oil prices have quadrupled.
Robert Rubin, who repeated that "markets go up, markets go down" while he was President Bill Clinton's Treasury secretary, said last week that "when oil was at $35, people said $60 oil would have tremendous effects on the economy, and at $90 we still have robust growth." But he added, "there comes some point where we will feel that vulnerability to high oil prices."
