Slowly rising oil prices haven’t had negative effect on economy
Conventional wisdom turned on its head
DALLAS — America’s rediscovered prowess in oil production is shaking up old notions about the impact of higher crude prices on the U.S. economy.
It has long been conventional wisdom that rising oil prices slow the economy by forcing consumers to spend more on gasoline and heating their homes, leaving less for other things. Instead, the economy grew at its fastest rate in nearly four years during the April-through-June quarter.
Oil prices are up roughly 40 percent in the past year. On Friday, benchmark U.S. crude was trading around $71 a barrel.
The national average price for gasoline stood at $2.85 per gallon, up 10 percent from a year ago, according to auto club AAA.
The United States still imports about 6 million barrels of oil a day on average, but that is down from more than 10 million a decade ago. In the same period, U.S. production has doubled to more than 10 million barrels a day, according to government figures.
“Because the U.S. now is producing so much more than it used to, (the rise in oil prices) is not as big an impact as it would have been 20 years ago or 10 years ago,” said Michael Maher, an energy researcher at Rice University.
The weakening link between oil and the overall economy was seen — in reverse — just three years ago. Then, plunging oil prices were expected to boost the economy by leaving more money in consumers’ pocket, yet GDP growth slowed.
Some economists still caution against minimizing the disruption caused by energy prices.
“Higher oil prices are unambiguously bad for the U.S. economy,” said Philip Verleger, an economist who has studied energy markets. “They force consumers to divert their income from spending on other items to spending on fuels.”
The federal Energy Information Administration said this month that the U.S. likely reclaimed the title of world’s biggest oil producer earlier this year. And that has made the impact of oil prices on the economy a more complicated calculation.
When oil prices tumbled starting in mid-2014, U.S. energy producers cut back on drilling. They cut thousands of jobs and they spent less on rigs, steel pipes and railcars to ship
crude to refineries. That softened the bounce that economists expected to see from cheaper oil.
Now, with oil prices rising, energy companies are boosting production, creating an economic stimulus that offsets some of the blow from higher prices on consumers. Oil- and gas-related investment accounted for about 40 percent of the growth in business investment in the April-June quarter this year.
Moody’s Analytics estimates that every penny increase at the pump reduces consumer spending by $1 billion over a year, and gasoline has jumped 24 cents in the past year, according to AAA.
“Usually with gasoline prices, speed kills — a gradual increase (like the current one), consumers can absorb that,” said Ryan Sweet, director of real-time economics at Moody’s. Consumers have other factors in their favor, he added, including a tight job market and better household balance sheets.
Sweet said the boon that higher prices represent to the growing energy sector means that the run-up in crude has probably been “a small but net positive” for the economy.
“That could change if we get up to $3.50, $4,” he said.