Stimulus Unlikely to Counter Rise in Oil Prices

Just at the moment the U.S. economy could use a boost, the recent surge in oil prices is having the opposite effect.

Even though more economists are calling for a stimulus package of spending increases or tax cuts to keep the U.S. economy out of recession, climbing oil prices since September have had all the negative effects of a tax increase -- one big enough to outweigh any likely stimulus.

The more-than-$30-a-barrel increase in oil prices over the past five months is like a $150 billion tax increase, said William D. Nordhaus, a Yale University economics professor. By paying more for oil, Americans have less left to save or spend. "It is clearly contractionary," Nordhaus said.

Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund, made a similar estimate. "The price of oil rising even from $80 to $100 a barrel is like adding $150 billion in taxes," he said. "It's quite a wallop."

That, Rogoff said, "is far bigger than any fiscal stimulus being discussed in Washington at the moment." Moreover, he said, "it's worse than a tax increase because the money is going to Saudi Arabia and Russia rather than the U.S. government."

Rogoff estimated that the increase in oil prices over the past five months "could easily translate into half a percent of GDP." He said: "It's not the biggest problem on the horizon compared to the collapse of housing prices, the crisis in productivity or the never-ending credit crunch. But it's not helpful." He added that losing half a point of growth could be enough to throw the weakened economy into recession.

Higher oil prices not only slow growth but also add to inflation, raising the specter of stagflation like that of the 1970s.

"Energy price increases, especially now that energy once again is becoming an ever-larger part of consumer spending and business costs, are both recessionary and inflationary," said Allen Sinai, chief global economist at Decision Economics. And that, he said, makes higher oil prices "a very bad kind of tax increase. They add to costs and can be part of an upward spiral of price inflation, which possibly feeds back into wage inflation and more price inflation."

All that makes it more difficult for Federal Reserve Chairman Ben S. Bernanke to fight inflation and an economic slowdown at the same time. "When energy prices are rising enough to hurt the economy and add to inflation, the central bank is conflicted," Sinai said.

Some of the damaging effects of oil prices are showing up in company earnings. On Wednesday, Alcoa reported that it was being squeezed by slumping demand for aluminum in North America and higher freight and energy costs. The company said 40 percent of its cost increases in the fourth quarter were energy-related.

Only a few months ago, many economists marveled at the relative absence of ill effects from high oil prices, which tripled from late 2001 through late 2006. In a paper titled "Who's Afraid of a Big Bad Oil Shock?" published in September, Nordhaus wrote that "the economy weathered an increase in real oil prices . . . without any major strain." He credited Fed officials, who focus on an inflation index that excludes oil and food prices. That prevented them from unnecessarily reining in growth. And he said economic "tailwinds" compensated for oil prices.

Since Nordhaus wrote that, oil prices have increased 50 percent more and, as in the 1970s when the economy was rocked by two oil price shocks, other problems are also hurting growth. The United States also imports about 50 percent more oil than it did in 1979.