When it comes to rising energy prices, it’s easy to assume the worst and repeat the same old mantras that seemed to work in the past.
Hardly a day passes when some economist or stock-market prognosticator doesn’t warn about the danger of lofty oil prices and the damage they’re certain to inflict on a teetering economy.
Americans recall oil-price shocks of past decades and can’t help but wonder what’s around the corner, especially now that China, India and other developing nations are squeezing into the oil market, while supply lines stretching to the Persian Gulf, Venezuela and other trouble spots seem less tenable than ever.
The natural assumption is that one more energy straw will break the economy’s back.
And yet the facts, to a large degree, speak otherwise.
Crude-oil prices surged 96 percent this year from their mid-January low to a late-November peak near $100 a barrel – and they remain about 80 percent higher.
Yet the economy didn’t collapse, corporate profits didn’t dry up, the stock market remains above where it started the year and inflation hasn’t gone through the roof (although a November uptick bears watching).
Even with dramatically higher oil prices, Gross Domestic Product rose a brisk 4.9 percent in the third quarter – and that despite the drag exerted by the real estate slump, tighter credit conditions and banking-industry struggles.
So why didn’t an 80 percent-plus spike in crude-oil prices cause more damage?
One explanation relates to the imperfect link between oil and gasoline prices. Simply put, crude oil accounts for little more than half the cost of a gallon of gasoline, with taxes, refining and distribution expenses, profits and other ingredients representing the rest.
These other inputs haven’t risen nearly as much as crude itself, helping to dampen the impact at the pump. At about $3 a gallon, gasoline prices are up 30 percent this year. That’s not insignificant, but it’s not an 80 percent spike, either.
More telling, people can afford higher prices now because energy doesn’t count as heavily in the average consumer’s budget as it once did.
Household energy consumption is certainly much lower than the last time rising energy costs precipitated a recession in the 1970s, said James Swanson, chief investment strategist at MFS Investment Management in Boston.
Energy accounts for about 6 percent of consumer spending these days, Swanson said, citing information from the Bureau of Economic Analysis. That’s down from more than 9 percent in the late 1970s and early 1980s.
David Wyss, chief economist at Standard & Poor’s, said energy costs as a percentage of household spending are even below where they were during the 1960s, that era of gas-guzzling muscle cars. At any rate, he forecasts crude-oil prices will stabilize around $85 a barrel in coming months.
“Energy isn’t as crucial to the economy,” he said during a talk recently in Phoenix.
On the bright side, higher oil prices encourage consumption and help to make alternative fuels more competitive.
Kevin Landis, president and chief executive officer at Firsthand Capital Management, a firm in San Jose, Calif., that runs technology mutual funds, is especially encouraged by the rise of solar power, where he says progress has been relentless.
Landis thinks alternative energy could prove as big, or bigger, than the Internet.
If so, the payoff from that – in terms of higher economic growth, less pollution and fewer costly diplomatic and military entanglements – would be immense.
And we’d have higher oil prices to thank, at least in part, for that development. In the meantime, we can be thankful that the economy is much more resilient than is commonly assumed, even at times when oil prices go through the roof.
