STORY By By MACK WILOWSKI |Investopedia| Higher oil prices likely won’t cause consumer spending and gross domestic product (GDP) to decline, Goldman Sachs (GS) analysts said in a recent research note while those at S&P Global think this increase will not last for long.
Why Higher Oil Prices May Not Derail The Economy
Analysts at the Wall Street giant attributed their forecast to a combination of three factors. They said the rise in oil prices is small from a historical standpoint, with the price of Brent crude—the international benchmark—up by just $20 per barrel since the start of the current rally. By comparison, prices surged by $40 in the first half of 2008, and $45 per barrel in last year’s first half.
Second, rising oil prices could be offset by lower electricity prices, thanks to falling prices for coal and natural gas, coupled with higher capital expenditures (CapEx) from energy sector companies, which the analysts estimated could boost GDP by 0.1 percentage points each quarter over the next four.
Lastly, analysts noted the Federal Reserve is unlikely to keep raising interest rates solely due to a rise in oil prices, especially at a time when core inflation and inflation expectations are trending downward. Analysts estimate that the rise in oil prices has already flowed through the Consumer Price Index (CPI), meaning any further increase is unlikely to drive inflation higher.
Oil prices have climbed by more than a third since the end of June, due to a combination of OPEC+ supply cuts, a resilient U.S. economy, and rebounding demand from China after last year’s COVID-19 lockdowns hobbled the world’s second-biggest economy.
Consumers Could Feel a Pinch
While adverse macroeconomic impacts may be mitigated, higher prices could pressure consumers at the gas pump. The average cost of a gallon of unleaded gas stood at $3.85 on Monday, according to AAA. That’s up from $3.54 at the end of June when the rally began, and compared to $3.71 at the same time last year.12
A silver lining is that spending on gas now accounts for a smaller share of total household consumption. The energy share of consumption fell to just 4%, on average, in July, with motor fuel at the gas pump accounting for roughly half of that, or just 2.3% of total consumption.
Government’s Influence on Prices Could Be Waning
In the past, the U.S. government has tried to mitigate surging oil prices by releasing oil from the Strategic Petroleum Reserve (SPR). However, this could be less effective now as reserves have dwindled to their lowest since 1983, after last year’s record drawdowns. While the quantity of oil in the SPR represents just a tiny fraction of the global supply, decisions to draw down or replenish the reserve could at least have a short-term impact on prices.
Respite Around The Corner?
However, not everyone is forecasting persistently higher oil prices ahead.
Jim Burkhard, Vice President and Head of Research for Oil Markets at S&P Global’s commodity insights division, said in an email the company expects oil prices to “ease from recent levels as demand begins to seasonally decline,” but cautioned that “supply restraint and the ongoing normalization of oil consumption in China will limit the downside.”
- American Automobile Association. “Gas Prices Drift Lower as Drivers Prepare for July 4th Travel.”
- American Automobile Association. “Gas Prices: Today’s AAA National Average as of 9/25/2023.”