DALLAS – The economy has withstood oil at $30, $40 and even $50 a barrel.
But could it handle crude at $70 or $80? A test may not be far away.
After oil reached new highs this week, the market’s bullish momentum is expected to push prices past the $60 mark in the coming weeks – ensuring more pain at the pump for drivers.
The only factor that can change the market’s course – a taming of energy demand – doesn’t appear on the horizon.
While a surge in demand has been pushing oil to record levels, it’s also why rising energy costs haven’t crushed the U.S. economy as they did during the 1970s and early 1980s.
“Prices have been driven up by a fundamentally strong global economy,” said Thorsten Fischer, an economist at Economy.com. Even if rising commodity costs temper economic growth, “it’s not going to be as harmful.”
Lower growth in the overall economy ultimately would balance out the oil market to keep prices from rising further. But in the short term, higher oil prices could batter already troubled industries.
Major airlines, crushed under the weight of intense competition and security burdens, haven’t been able to pass along the full effect of higher fuel costs to consumers.
Delta Air Lines acknowledged last week that higher jet-fuel prices could help push the carrier into bankruptcy this year.
Trucking firms have shared some costs with customers, leading to rising prices for consumer goods on store shelves. But better business due to economic growth is partially offsetting the higher prices.
Even as the average price of gasoline zooms past $2 a gallon, individual motorists have taken little action. U.S. gasoline demand is up 2 percent from a year ago, the latest sign that consumers are adjusting to a higher price environment.
After closing at a record $56.46 a barrel on Wednesday, oil for April delivery rose as high as $57.60 Thursday on the New York Mercantile Exchange. It closed at $56.40, down 6 cents, but the May contract that takes effect next week is already higher.
The average price of unleaded gasoline at the pump has reached a record $2.06 a gallon nationwide, AAA said. In inflation-adjusted terms, the record U.S. average was $3 a gallon in March 1981.
Almost every recession since World War II has been preceded by a sharp increase in oil prices. But that’s far from most experts’ minds these days.
“We’re still in a situation where the impact on the economy is simply to act as a drag on growth,” said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.
Rampant speculation has drawn some blame for sending prices up – almost 50 percent higher than a year ago – even though supplies are above average levels.
The weakening U.S. dollar alone has probably added about $8 to $12 to the price of oil, Brown said. But the biggest driver of prices has been a surge in demand from China and the United States.
Facing strong demand, some members of the Organization of Petroleum Exporting Countries admitted this week that they’ve lost control of prices as they pump at nearly full capacity.
As long as higher prices are driven by rising demand rather than supply shortages, experts say, the nation’s economic growth could continue until oil breaches $90 a barrel to pass the inflation-adjusted highs of the early 1980s.
Even oil prices treading into new inflation-adjusted territory may not be the kind of economic trouble that once might have been expected.
Thanks to conservation measures put in place after price shocks of the 1970s and early 1980s, the U.S. economy today uses half as much energy per unit of economic output.
Today, some companies are already taking initial steps to conserve, shifting their transportation mode from trucking to more efficient railroads.
Higher energy prices might restrain job growth in the short run, but over time they may help by encouraging companies to shift from energy-intensive processes to more labor-intensive production, Brown said.
Some individual consumers have started to react by considering fuel-efficient vehicles and avoiding gas-guzzling sport utility vehicles. But higher energy costs haven’t stifled expenditures in other areas.
“The U.S. consumer has by and large kept spending,” Brown said. “The economy is growing well, and that’s putting money in people’s pockets.”
Still, some analysts say a shift in consumer behavior and national policy could be in the offing, with a greater focus on other forms of energy to cope with higher crude oil prices.
The U.S. Senate’s vote this week to allow oil drilling in the Arctic National Wildlife Refuge reflected the heightened concerns about accessing new energy supplies and lowering prices over time. Until now, congressional Republicans had failed to gain enough support to overcome environmental concerns about drilling in the region.
Even supply increases in the coming years from Iraq, Russia and other nations are only expected to be short-term solutions.
“There is the potential for reprieve, but that reprieve is just a bump in the road,” said Mark Baxter, director of Southern Methodist University’s Maguire Energy Institute. “It delays the inevitable – that we do need alternate forms of fuel.”
Investment in clean-coal technology, nuclear power and renewables such as wind and solar energy are regaining momentum as worries about energy supplies grow, Baxter said.
“People are starting to come to the realization that not only are prices going up, but the solutions are going to be fewer and farther between,” he said.
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PHOTO (from KRT Photo Service, 202-383-6099): Gas prices
GRAPHIC (from KRT Graphics, 202-383-6064): Oilprices
AP-NY-03-17-05 1956EST
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