Analysis: Oil spike 2008 all over again? Not for U.S. economy

WASHINGTON Tue Feb 22, 2011 2:36pm EST

A woman walks past gasoline prices posted at Fleet Fueling in Burbank, February 22, 2011. REUTERS/Fred Prouser

A woman walks past gasoline prices posted at Fleet Fueling in Burbank, February 22, 2011.

Credit: Reuters/Fred Prouser

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WASHINGTON (Reuters) - Don't panic.

That was the message from Nobuo Tanaka, the executive director of the International Energy Agency, to those who fear it's 2008 all over again as unrest in oil-producing Libya pushes crude prices back up toward the triple digits.

As far as the U.S. economy is concerned, Tanaka's reassuring words seem justified. Even if oil prices remain above $100 a barrel this year, that would most likely put a moderate counterweight on consumer spending, but not nearly enough to halt a recovery which is gaining momentum.

There are three big differences between 2008 and now.

* The underlying growth rate is far stronger than it was in 2008, when oil prices hit $147 per barrel just as the housing bust and subsequent financial crisis brought on the worst recession in 80 years.

* A payroll tax cut that went into effect in January puts an estimated $112 billion more in consumers' pockets in 2011. That would be enough to offset a gasoline price rise of 80 cents per gallon, based on the government's latest 2011 gas consumption forecast.

* Households have a larger savings cushion to absorb pricier gasoline, and won't be as shocked by $4 a gallon the second time around.

"Oil prices will exert a drag on the economy, but what we've seen so far isn't enough to derail the recovery," said James Hamilton, an economics professor at the University of California-San Diego, in an email to Reuters.

THIS TIME IT'S DIFFERENT?

To be sure, higher gasoline prices act as a tax on consumption. Retailer Wal-Mart said earlier on Tuesday that rising gas prices and high unemployment were weighing on customers' minds.

Mohamed El-Erian, co-chief investment officer for bond fund PIMCO, said in the short run, Middle East unrest will be "stagflationary" for the global economy.

But there is reason to believe rising oil prices will sting a bit less this time, at least in the United States.

During the 2008 oil price spike, the economy was already in a recession that began in December 2007. Consumer spending subtracted from growth in the first quarter of 2008, several months before oil peaked in July of that year.

This time, consumer spending has been a positive contributor to economic growth for six consecutive quarters. It added 3 percentage points to growth in the fourth quarter of 2010, the strongest showing in nearly five years.

The personal saving rate stood at 5.4 percent in the final period of 2010, double what it was during the 2008 oil spike.

The one major indicator that looks worse than in 2008 is employment. The jobless rate, at 9 percent, is twice as high as it was in 2008. However, it has declined in the past two months, and that has boosted consumer confidence.

For the U.S. Federal Reserve, a rise in oil prices complicates monetary policy somewhat but is unlikely to alter its ultra-easy stance as long as unemployment is elevated. The central bank has said it watches gasoline prices closely for any sign that it is cannibalizing consumption.

SUPPLY AND DEMAND

The oil market itself offers more cause for optimism. The price on the New York Mercantile Exchange was some $13 a barrel lower at around $94 than the London-traded Brent crude price on Tuesday, thanks to surging inventories in Cushing, Oklahoma, which is the delivery point for the NYMEX contract.

That means some U.S. consumers benefit from lower prices.

Tanaka, the IEA executive director, said OPEC is in a better position to handle any supply disruption.

"Our message to the market is don't panic," Tanaka told Reuters at the International Energy Forum in Saudi Arabia. "OPEC has spare capacity of 5 million barrels (per day), unlike 2008 when it was only 2 million barrels."

As for U.S. businesses, the oil pain appears to be limited so far. Richard Hastings, a consumer strategist at Global Hunter Securities, said Wal-Mart customers were cutting back on shopping trips because of high gas prices.

However, companies were already coping with rising costs for a host of commodities, including cotton and grains, and some have raised prices to share the burden with consumers.

U.S. auto makers, which suffered a severe blow in 2008 when oil prices curbed demand for highly profitable trucks, have more fuel-efficient vehicles on offer now.

As for airlines, expensive oil is never a good thing, and Tuesday's sell-off in airline stocks shows investors are well aware of the risks. But carriers are also benefiting from a rebound in air travel as the economy picks up, and some have managed to push through price increases.

Hamilton, the UCSD economist, said as long as oil supply disruptions remain modest, the U.S. economy will manage -- presuming the labor market continues to heal as expected.

"However, events in North Africa and the Middle East could clearly lead to much larger disruptions in world oil supplies, and this week's news reminds us that the situation there could change for the worse pretty quickly," Hamilton said.

(Additional reporting by Amena Bakr in Riyadh, Jessica Wohl in Chicago, Tom Doggett in Washington and Matthew Robinson in New York)

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Comments (2)
johannesg wrote:
The American left (Nancy Pelosi, et al) felt no qualms whatsoever accusing Bush and co of manipulating the oil markets for their own gain. As proof, they’d point to surge in crude prices during the Bush administration’s tenure – 9/11, war, and global demand be hanged.

When US President Obama took office, crude was at US$46. Now that it’s over US$100, not one of them would say Obama was the one to thank/blame. He isn’t, of course.

Hypocrisy, sheer hypocrisy, mixed with ignorant rhetoric…

Feb 22, 2011 2:29pm EST  --  Report as abuse
chapapet wrote:
oil reaching $4.00 a gallon the experts say will have little if any impact on the US economic recovery; how about $5.00, $6.00 a gallon any concern then…
now people will take from their savings to make-up the difference…
or they can afford the food for the household and an additional 33% increase to run their automobile…
I realize it is a samll portion of the household’s total monthly bill but every little bit erodes buying power…
we are bracketed by the commodity traders who can only promote one reason or another for higher energy prices…
well if everyone says it is nothing like 2008 and whatever the price for gas who am I to argue…
thank you.

Feb 22, 2011 2:32pm EST  --  Report as abuse
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