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Economy Adjusts To Rise In Oil Prices, Analysts Say

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By DAN CATERINICCHIA, The Associated Press

Published: November 2, 2007

WASHINGTON - As oil prices climb toward the once unthinkable $100 a barrel level, fears that the U.S. economy could tip into recession also are rising.

To spur spending and borrowing, the Federal Reserve on Wednesday cut a key short-term interest rate for the second time in two months. This, even after the economy grew at a respectable 3.9 percent annual rate in the third quarter and fuel demand continues to rise. So what gives?

Anxiety-inducing headlines can cloud reality, analysts said, especially when it comes to a critical commodity such as oil, whose economic impacts are best measured over time.

Through October, the average per-barrel cost of oil is only 1.3 percent higher than during the same period in 2006, and motorists have paid just 3 percent more per gallon on average at the pump.

To be sure, the strain of higher oil prices is being felt, particularly among fuel-intensive businesses and poorer Americans, who spend a higher percentage of their income on energy than the rest of the population. But the recent surge in oil prices comes on the heels of a multiyear run-up, and that has given the overall economy time to adapt, analysts said.
Oil prices - which zipped past $96 per barrel Thursday - would need to surpass $100 a barrel and remain at that level for at least two weeks or more to inflict widespread and lasting economic damage, said Tyson Slocum, director of the energy program at consumer group Public Citizen.

"Short little jumps aren't going to do it. It will have to be sustained over time," he said.

Fortunately, the consensus view on Wall Street is chances are slim that oil will surpass $100 a barrel and stick there for any length of time.

The severe housing slump and attention-getting credit crunch are tapering U.S. economic growth, which will trim energy demand and bring prices down to $70 to $80 a barrel, predicts Fimat analyst Antoine Halff.

"The spike we see currently doesn't have too much staying power," Halff said.

But all bets are off if tensions between the United States and Iran escalate, he added.
Oil Prices Hit Record

Even a snapshot of today's prices, compared with prices a year ago, is psychologically alarming, however.

Crude oil prices hit a record overnight Thursday after the United States reported a surprisingly large drop in inventories. Light, sweet crude for December delivery fell $1.04 to settle at $93.49 a barrel on the New York Mercantile Exchange after rising as high as $96.24, a new trading high, overnight. That compares with $58.71 a barrel on the same day last year.

At $2.91 a gallon on average nationwide, gasoline prices are well above the year-ago average of $2.21 per gallon, according to AAA and the Oil Price Information Service. Prices usually fall sharply after Labor Day but this year have risen about 8 cents per gallon since summer's end.

However, looking beyond the day's headlines is revealing and comforting - from an economic perspective. The average per-barrel price of crude on the New York Mercantile Exchange through Oct. 30 was $68.22, compared with $67.34 over the same period in 2006, according to Energy Department data.

The increase is slightly more pronounced at the pump. Regular gasoline has averaged $2.75 per gallon through the first 10 months of the year, compared with an average of $2.67 a gallon over the same period last year.

Daily Demand Up This Year

Consumers are changing their behavior in response to higher prices at the pump. Sales of hybrid vehicles and energy-efficient compact cars are expected to set records this year, while sales of gas-guzzling pickups and sport utility vehicles have declined.

Jason Shogren, a professor of economics at the University of Wyoming, said the U.S. economy has held steady when oil prices increased in recent years because the price changes were gradual. But even price spikes, like in the crude oil market in recent weeks, is not enough to convince Americans to cut back on their driving.

The average daily demand for gasoline is up slightly so far this year at 9.3 million barrels, compared with 9.2 million barrels a day through October 2006, according to government data.

Consumers today have more discretionary income and the economy is less energy intensive than it was in the 1970s and 1980s, when oil price shocks easily triggered recessions, economists say.

Still, Federal Reserve policymakers cited soaring oil prices Wednesday when they decided to cut rates, signaling a conviction that what's as important as any price changes in a key commodity are perceptions about those price changes.

"People respond to psychological barriers fairly significantly," Slocum said.

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