3 comments

1. gagan ghai says :

   On 01/29/11 @ 00:32

   FEW trends cast shadows on economies and politicians like a rise in the cost of petrol. Barack Obama’s presidency, so far a minefield of crises, can add one more in the form of higher prices at the pump. Entering the last full week of January the average price of a gallon (3.7 litres) of petrol stood at $3.11, up 40 cents from a year earlier. Fuel has never cost so much in January, but that is unlikely to be the highest price Americans pay for it this year.
   
   
   The primary culprit is the buoyant price of oil, itself a product of global economic recovery. After spiking to $145 a barrel in July 2008, oil prices collapsed along with the financial system. But renewed growth has rekindled the demand for commodities and pushed oil prices back from around $30 per barrel to over $90. Concerned that the rebound may derail vulnerable recoveries, leaders of some oil-producing countries promised to increase supply at a conference on January 24th. But their efforts may merely slow the rise in prices.
   
   The potential threat to the economy may hinge on how well Americans have adapted in the wake of the oil shock of 2007-08. Households may, it seems, be insulating themselves from dearer petrol. From 2006 to 2010 the average fuel economy of new cars and light trucks rose from 25.8 miles per gallon of petrol to 29.2. But other signs point to a return to business as usual. More drivers are back on the roads, commuting to new jobs or going on holiday as recovery accelerates. As of last November, miles driven were back to 2007 levels, and a new record high is likely this year. A 13% increase in car sales supported the recovery in 2010, but purchases of light trucks and sport-utility vehicles (SUVs) led the way. To the end of November of last year, SUV sales were up 41% from the end of 2009, while sales of petrol-electric hybrids were down slightly. The petrol-hogging motors that America embraced in the cheap-oil 1990s are a liability now.
   
   And further price increases are likely. Petrol prices typically rise from the winter to the summer driving season. In 2008 prices were below current levels in the month of January but spiked at over $4 a gallon in the summer. That would be a bargain for Europeans, who generally face higher fuel tax rates. But because Americans are more dependent on petroleum, using twice as much per person as other industrialised countries, cost increases have a swifter impact on household budgets.
   
   America can scarcely afford such a blow. Recovery remains reliant on consumer spending, which accounted for two-thirds of third-quarter growth. But petrol is absorbing a rising share of consumer resources. Meanwhile, James Hamilton, a University of California economist, has found that a ten-cent rise in petrol prices is associated with a half-point drop in consumer confidence. As fuel costs rise, households may cling more tightly to the money not going to the pump. And that will place yet another drag on an economy still struggling to create jobs.

2. admin (Member) says :

   On 01/29/11 @ 13:44

   @gagan Ghai from John Lounsbury - - -
   
   Thanks for your excellent discussion of the economic burden of higher oil prices. You mention James Hamilton and his in-depth work on the effects of oil price shocks on economic activity. Prof. Hamilton posted an article "Oil Shocks and Economic Recessions" recently on our analysis blog (http://econintersect.com/wordpress/?p=5083 ) which summarizes his research paper on the subject.
   
   Thanks again for such a complete discussion of a major problem.

3. admin (Member) says :

   On 01/30/11 @ 14:15

   @Lee from John Lounsbury
   
   Thanks for the excellent reference link. As you can see we haven't figured out how to get active links in out comments yet.
   
   Readers: Please cut and paste link.