Fair use for educational/research purposes only!

Rising energy prices Oil's bite worse than expected

One of the big economic miscalculations of the past year may have been underestimating the impact rising energy prices would have on the economy.

In congressional testimony last year, Federal Reserve Chairman Alan Greenspan dismissed suggestions that the high cost of oil and other fuels would crimp economic growth.

The conventional wisdom was that the USA was so much less dependent on oil than it was during the last energy crisis in the 1970s that the economy would be able to weather a blip in prices.

But the jump in oil prices wasn't fleeting. The Organization of Petroleum Exporting Countries surprised just about everyone by forging a unified front on oil production in 1999 and 2000. After years of cheating on production quotas, they stuck to the limits and oil prices, as a result, topped $35 a barrel. At the same time, a strong global economy helped boost demand for energy. Prices for natural gas and heating oil began to climb. Consumers, socked by higher energy bills, cut back on discretionary spending.

Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas, says if oil prices had remained about $10 to $15 a barrel instead of $25 to $30, economic growth might be three-tenths to eight-tenths of a percentage point higher now.

Higher energy prices also squeezed companies. The economic boom had been fueled by firms spending profits on productivity-enhancing equipment. Increased energy costs ate into their ability to do that, Brown says.

It may have been companies cutting back, more than consumers, that eventually hit economic growth. From 1992 to 1997, energy expenditures amounted to 4.8% of household after-tax income, according to the Energy Department. When energy costs fell in 1998, the share dropped to 3.8%. In January 2001, the figure was back up to 4.8%. While that's an adjustment, it wasn't an enormous drain.

''The higher cost of energy had an impact, but it was disproportionate among different groups,'' says Bill O'Grady, energy analyst at A.G. Edwards & Sons. ''At the lower end of the income scale it is a lot more sensitive than we thought.''

Outlook: Experts expect oil prices to stay about $25 a barrel for the foreseeable future until the world economy falls into recession and demand softens.

http://cgi.usatoday.com/usatonline/20010409/3215857s.htm

-- Martin Thompson (mthom1927@aol.com), April 09, 2001