Oil Prices and the Effects on U.S. Economy

Oil Prices and the effects on U.S. Economy

In May of 2000, Forbes magazine ran an article minimizing the impact that oil prices would have on the US economy. In the article, author Peter Huber writes: Bill Gates is a very rich man, and that lets Alan Greenspan worry less about oil prices than he used to. Greenspan puts it more broadly, of course: "The economy has lessened its needs and ties to energy." Oil especially. It just doesn't take much of it to make software. Just four years later, Huber’s article seems less accurate than it might have been viewed at the time it was written and yet, many of the indications presented in the article can be reasonably said to have survived the economic tumult that rising oil prices have caused in the US. It is, however, difficult to assess how much of an impact the price of oil is responsible for causing to various aspects of the economy. To be sure, oil price has a measurable impact, but at what point does the terrorist attack of 2001, the corporate scandals of 2002 and the Iraq war of 2003 become simply economic footnotes rather than an influencing factor on the buying power of the American public. After all, the price of oil does not exist in an economic vacuum and yet there are some indicators that can be tied directly to the price of oil. Understanding the impact of oil prices involves examining the economic effects that occur directly following rising oil prices and placing those effects in their proper context.

Rising oil prices hurt the consumer in a number of ways. When the price of oil rises there is necessarily a domino effect on many other costs aside from just an increase in gasoline.

Expensive oil hurts the U.S. and world economies. Higher energy prices cut into consumers' budgets for other goods and services, and that hurts economic growth and corporate profits.

With that in mind, a question arises - How does the increase in oil prices hurt the average consumer? Obviously each penny increase in the cost of fuel impacts the consumer directly but that same fuel increase is also causing increased prices for groceries, airfare, shipping and a number of other areas as well. In the end, the consumer isn’t just hit with a higher price at the gas pump; the consumer is hit with cost increases across the board because companies pass those costs along. But the price isn’t just pennies when discussing the recent jump in crude oil prices. After hovering at $25 to $35 per barrel, oil climbed to more than $55 per barrel in the fourth quarter of 2004 representing another 37% rise over a very short three-month period. A leap of this nature in the price of oil appeared to be catastrophic for the economy and yet significant economic problems have not occurred. At least, not yet.

It could be said that no calamities have occurred from the dizzyingly high oil prices because enough time has not elapsed to calculate the damage. But placing the price of oil in the proper context helps to explain why similar problems to those encountered in the 1970s have not been repeated with this oil rate hike. The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s. In spite of the recent surge in the price of oil, nearly $120 per barrel based on U.S. benchmark futures. It is this fact that makes the case that although oil prices are extremely high; they are not to