NYT: Climbing Gas Prices Could Slow a Recovery

[steven johnson]

Since last summer gas costs to consumers dropped from $1.5 billion a day to as $600 million a day in January. But now it's back up to around $1 billion per day. Fuel price rises may lead to a rise in the inflation rate and then the Fed will have to tighten credit. This would stall any recovery.

By CLIFFORD KRAUSS
Published: June 09, 2009

Gas prices have risen 41 days in a row, to a national average of almost $2.62 a gallon. That is a sharp increase from the low of $1.62 a gallon that prevailed at the end of last year.

The price increase mystifies some analysts, who say that oil demand remains weak. According to the International Energy Agency, worldwide demand is down 2.6 million barrels a day from last year, mostly because of declines in driving and slower economic activity in the United States and other industrialized countries. Oil inventories are high.

"I'm scratching my head," said Adam Sieminski, chief energy economist at Deutsche Bank, who attributes oil's rise to an influx of investment dollars.

Glenn Darden, chief executive of Quicksilver Resources, an independent oil and natural gas producer in Fort Worth, predicted that oil prices would keep rising. "We were below the cost of drilling and production costs, so that situation could not last," he said. "Oil being at $70 or $80 or $100 a barrel is where it's going."

http://www.nytimes.com/2009/06/09/business/09gas.html

In his 2005 analysis, Daniel Nevins reported that based on previous oil price shocks, every $10 per barrell rise in oil prices translated to a 0.3% fall in economic growth in the U.S.

Ominously, he wrote in 2005:

"Although the pass-through of home equity extraction to economic growth is subject to debate, this wealth effect, coupled with the boost to employment from housing activity, may explain why the economy has appeared resistant to rising oil prices to date. Greenspan’s $600 billion housing wealth effect dwarfs our estimate of the direct effect of rising oil prices of 0.8% of GDP, which is $89 billion. Of course, it is by no means certain that the housing boom will continue. Higher energy prices are among a number of factors that could help to eliminate the froth that appears to be worrying Chairman Greenspan. ""Rising oil prices were among the culprits in each of the past four recessions and present a real risk to the current expansion. . . . we believe there are two scenarios in which rising energy prices could combine with the lagged effects of monetary policy tightening to drag the economy towards recession, despite vast amounts of disaster relief spending. The first recession scenario is a significant slowdown in the housing sector with energy prices remaining at historically high levels. Housing has provided a tremendous stimulus to the current expansion. It has created as many as half of the new jobs added to the economy by some estimates, while also contributing a boost to wealth that consumers have leveraged through home equity extraction. We do not believe that the expansion could weather a triple whammy of rising interest rates, record-high oil prices, and a real estate bust. The second recession scenario is a further surge in oil prices beyond the current $60-$70 range. If energy prices continue to rise at the rapid pace of the past two years, there will be a point at which the damage to confidence and consumer spending overwhelms additional government spending."

Sounds like he had it pretty well scoped out in advance.

Oil Prices and the "R" Word

[Teaser]

1. here's hoping!

nothing could be worse for the economy than a recovery.

[customerserviceguy]

2. Rising interest rates would do the same thing

and it's clear that the baseline interest rates (like the Federal funds rate, for example) cannot go any lower than they are now. I've noticed the uptick in home mortgage rates lately.

[elleng]

3. Sieminski said more than the above quote:

I’m scratching my head,” said Adam Sieminski, chief energy economist at Deutsche Bank, who attributes oil’s rise to an influx of investment dollars. “Right now, the sense is the economy is on a path toward improvement, and there is a lot of cash sitting on the sidelines. So hedge funds, sovereign funds, pension funds are investing in futures and oil stocks and commodity indexes.”

Its speculators!!! 'hedge funds, sovereign funds, pension funds are investing in futures and oil stocks and commodity indexes.”'

It may not be illegal, but its sure anti-social.