James Hamilton posted a quick study of the impact of oil prices on car sales in “Oil prices and the U.S. economy” in EconBrowser. Hamilton demonstrates from recent history that once the economy has made an adjustment to high oil prices, a subsequent price run will not impact the economy until it reaches new highs. In other words, oil prices must force the economy (consumers and businesses) to make new adjustments before a significantly negative impact occurs. Auto sales already greatly favor more fuel efficient vehicles, thus blunting the traditional drag on the auto sector as consumers shun bigger, gas guzzlers.
Oil’s relative share of consumer expenditures is another factor to consider. Amazingly, energy’s overall share of consumption has declined as gas prices have soared in recent months.
For more detail and data see “Oil prices and the U.S. economy“
Time for some comedic relief. On my main site “One-Twenty Two” I posted my own satirical commentary on the recent announcement from Attorney General Eric Holder about the formation of the Oil and Gas Fraud Working Group. This taskforce is supposed to ensure prices properly reflect “real” supply and demand factors from the marketplace. In my post, I ponder what the story would look like if Holder decided to go after the Federal Reserve’s role in generating higher oil and gas prices (mainly through killing the U.S. dollar). Click here to read it.
“The Obama administration is considering tapping the Strategic Petroleum Reserve in response to rapidly rising gasoline prices brought on by turmoil in the Middle East, the White House chief of staff, William M. Daley, said on Sunday.”
While energy prices are excluded from core measures of inflation, fears are rising along with oil prices that the on-going fragile economic recovery could soon be stymied. The administration is understandably trying to proceed cautiously. For example Energy Secretary Steven Chu noted:
“We don’t want to be totally reactive so that when the price goes up, everybody panics, and when it goes back down, everybody goes back to sleep.”
Moreover, as the fighting in Libya grows worse, and the Gaddafi regime digs in its heels, the prospects grow for an extended civil war. Under such a scenario, the strategic oil reserve may prove inadequate for keeping a lid on oil prices. Supplies may not even be disrupted in a significant way, but the fears of larger disruptions could be enough to continue propelling prices higher.
Royal Dutch Shell Plc beat all analyst forecasts by reporting an 18 percent jump in third-quarter profits thanks to higher oil and gas prices, setting a trend for the sector… ConocoPhillips, the third-largest U.S. oil company, said on Wednesday that its quarterly profit more than doubled. Both companies were helped by a 12 percent rise in crude prices compared to the third quarter of 2009, while U.S. natural gas prices were 29 percent higher and British gas prices doubled.
Oil futures are now trading above $80 a barrel. The WSJ explains:
“A combination of increased heating oil demand to combat cold weather in the U.S. Northeast and expectations of rising consumption of all fuels as economic conditions improve has pushed oil prices up 17% since Dec. 14.”