Rising oil, gas prices add to US economic challenges

AS THE US ECONOMY struggles to emerge from its pandemic-induced hibernation, consumers and businesses have encountered product shortages, hiring difficulties and often conflicting public health guidance, among other challenges.

Now the recovery faces a more familiar foe: rising oil and gasoline prices.

West Texas Intermediate, the US oil-price bench mark, hit $76.98 a barrel on Tuesday, its highest level in six years, as OPEC, Russia and their allies again failed to agree on production increases. Prices moderated later in the day but remained nearly $10 a barrel higher than in mid-May.

Reflecting the increase in crude prices, the average price of a gallon of regular gasoline in the United States has risen to $3.13, according to AAA, up from $3.05 a month ago. A year ago, as the coronavirus kept people home, gas cost just $2.18 a gallon on average. The auto club said on Tuesday that it expected prices to increase another 10 to 20 cents through the end of August.

The rapid runup comes at a delicate moment for the US economy, which was already experiencing the fastest inflation in years amid resurgent consumer activity and supply-chain bottlenecks. And it could cause a political headache for President Joseph R. Biden as he tries to convince the public that his policies are helping the country regain its footing.

Asked about oil prices at a White House news conference on Tuesday, Jen Psaki, the press secretary, said the administration was monitoring the situation and had been in touch with officials from Saudi Arabia and other major producers. But she suggested that the President had limited control over gas prices.

“There sometimes is a misunderstanding of what causes gas prices to increase,” Ms. Psaki said. “The supply availability of oil has a huge impact.”

Indeed, energy experts said the recent jump in oil prices had more to do with global economic and geopolitical forces than with domestic policies. Global energy demand slumped when the pandemic hit last year, eventually leading OPEC and its allies to cut production to prevent a collapse in prices. Demand has begun to rebound as economic activity resumes, but production has not kept pace: OPEC +, the alliance of oil producers, on Monday called off a teleconference to discuss increasing output.

The direct economic effect of higher oil prices will probably be substantially more modest than in past decades. Energy overall plays a smaller role in the economy because of improved efficiency and a shift away from manufacturing, and the rise of renewable energy means the United States is less reliant on oil in particular.

In addition, the surge in domestic oil production in recent years means that rising oil prices are no longer an unambiguous negative for the US economy: Higher prices are bad news for drivers and consumers, but good news for oil companies and their workers, and the vast network of equipment manufacturers and service providers that supply them.

Still, the costs of higher prices will not be felt equally. Poor and workingclass Americans drive older, less efficient cars and trucks and spend more of their incomes on fuel.

Gas prices also remain a potent and highly visible symbol of rising prices when many consumers — and some economists — are nervous about inflation. Consumer prices rose 5% in May from a year earlier, the biggest annual increase in more than a decade, and forecasters expect figures for June, which will be released next week, to show another significant increase.

Policy makers at the Federal Reserve have said they expect the increase in inflation to be short-lived, and they are unlikely to change that view based on an increase in energy prices, which are often volatile even in normal times, said Jay Bryson, chief economist at Wells Fargo.

But if rising oil prices lead consumers and businesses to believe that faster inflation will continue, that could be a harder problem for the Fed. Economic research suggests that prices of things that consumers buy often, such as food and gasoline, weigh particularly heavily on their expectations for inflation. With public opinion surveys showing increasing concern about inflation, rising oil prices increase the risk of a more lasting shift in expectations, said David Wilcox, a former Fed economist, now a senior fellow at the Peterson Institute for International Economics in Washington.

“I don’t expect the price of oil to be the last straw on the camel’s back, but it is another straw on a camel’s back that’s already carrying a fair amount of baggage,” Mr. Wilcox said. “There is a much greater risk today of an inflationary psychology taking hold than I would have said three to five years ago.”

Domestic oil production is expected to rise in coming months as higher prices and rising demand lead companies to step up drilling. But any rebound is likely to be gradual. US oil companies have been cautious about investing in new exploration and production over the last year, even as oil prices have roughly doubled from the first half of 2020, when the pandemic punctured demand. Company executives say they are focused on share buybacks and debt reduction as sales rise.

The Energy Department predicts that production will average 11.1 million barrels a day this year and 11.8 million barrels a day in 2022, 400,000 barrels a day less than in 2019.

Even without a surge in domestic oil production, many forecasters doubt that prices will continue to rise at their recent pace. OPEC members generally agree that production should increase; they just disagree about how much. And a new nuclear deal with Iran or a thawing of US-Venezuela relations could bring a flood of new supplies. Iran alone could potentially add 2.5 million to 3 million barrels of oil daily on the global market, or roughly a 3% addition to supplies.

At the same time, the spread of new coronavirus variants has led some countries to reimpose or tighten restrictions on activity, which could dampen demand for oil. Capital Economics, a forecasting firm, said Tuesday that it expected oil prices to peak at about $80 a barrel before falling back as supply increases. But the firm said that a collapse in prices or a further spike both remained possible. —