Crude Oil, economy, price index, GDP, economic expansion
SOURCE: NYTIMES
An Oil Shock That Could Be an Economic Stimulus in Disguise
By EDUARDO PORTER
Published: August 21, 2004
How much will expensive oil hurt?
Over the last 30 years, the United States has been driven into recession three times by abrupt surges in the price of oil. As the price of crude has surged over the last two weeks, reaching new heights almost daily, some economists have begun to worry that the current "oil shock" will slam the brakes on the nation's economic expansion again.
It probably won't. Despite the disquieting parallels with the oil shocks of the 1970's, the 1980's and the 1990's, the impact of the current oil spike on the American economy is likely to be much less intense than in previous surges.
Not only is the economy much more energy-efficient - gasoline prices have been stable in recent weeks - but, more important, in contrast to previous periods when oil shocks occurred, inflation remains under control. So rather than pushing up interest rates and compounding the economic slowdown, rising energy prices today are slowing the rise of interest rates, providing an unexpected dollop of economic stimulus on the side.
"The past oil shocks gave the economy a one-two big punch," said Ethan Harris, Lehman Brothers' chief economist. "This time it's more like little jabs."
Oil prices started rising substantially in May, driven by growing world demand, as well as by concerns over possible disruption of supplies from an unstable Iraq and other major producers like Russia and Venezuela.
Though prices fell back slightly in June, they picked up again in July - and truly set off alarm bells as the benchmark crude oil contract neared a record $50 a barrel this week on the New York Mercantile Exchange.
Crude oil for September delivery, however, fell by 84 cents a barrel yesterday, to $47.86.
Undoubtedly, the recent price surge will hurt.
Rising gasoline prices have weighed down consumer spending, the driver of economic growth over the last three years. More costly oil has also proved to be a drag on the more energy-intensive Asian economies - like China's - cutting into American exports.
Energy prices have added roughly one percentage point to inflation over the last year, shaving consumers' purchasing power proportionately. This contributed to a cooling economy in the second quarter, when the growth of consumer spending slowed to 1 percent at an annual rate, from 4.1 percent in the preceding three months.
"Energy prices spiked in May, and in June a host of economic reports turned negative," said Robert Mellman, an economist at J. P. Morgan Chase. "I don't think it's a coincidence."
Yet the economy is showing some resilience. The consumers who...
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