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Can a plucky U.S economy surmount $80 oil?

by praveen
October 8th, 2007

The U.S. still accounts for nearly a quarter of the world oil market

Oil prices an economic scourge indecades past, have soared to record levelsin recent years. But the fallout often seemed negligible: Americans kept spending; employment keep growing; factories, construction crews and retail stores stayed busy.

Now , however, the economy may be starting to sputter as damage from the weak housing market drags down growth. If payrolls drop significantly, will high-price crude oil begin to cause pain in a way that it hasn’t in nearly three decades?

Many economists do not think so, entered a recession, the price of oil would quickly drop.
“The U.S. is the single largest oil-consuming nation in the world.” said Stephen P.A. Brown, director of energy economics at the Federal Reserve Bank of Dallas. “A slowdown here ought to bring the price of oil down.”

Global economy
That view is by no means unanimous. The global economy has been growing rapidly, and oil consumption overseas keeps rising.

A few economists say it is possible that even if the American economy weakens, demand abroad will be strong enough to keep oil prices high.

“Our relative importance in the global markets is diminishing,” said Larry Gold stein, President of the Petroleum Industry Research Foundation in New York. An American economic slowdown, he said, “won’t have a visible impact on high oil prices.”

If that view proves to be right, the U.S. could conceivably find itself in a situation reminiscent of the 1970s, with a weak economic growth and high-price oil taking a double bite out of consumers pocketbooks.

The situation is murky in part because there is little historical precedent for understanding today’s oil market. Less than a decade ago, oil fell below $11 a barrel.

Oil at $50 was a distant prospect, and the prevailing wisdom was that a run-up of that extent would do serious economic damage.

But as the gobal economy boomed, oil blew past $50 late in 2004, then past $60 in mid-2005.

Many Americans compained about the rising price of gasoline, but the economy shrugged off pump prices that would exceed $3 a gallon and kept growing.

On September 20, crude oil for next-month delivery settled at a record price of $83.32 a barrel and has stayed above $80 most days since then. (Adjusted for inflation, the record high for oil was nearly $102 a barrel early in 1980, after the Iranian revolution, but that price level did not last long.)

Part of the reason that costly oil has not done too much damage, it seems clear, is that the economy has become less sensitive to energy prices than it was in the 1970s.

Some ecnomists do say that high-price oil has been a strain on the economy in the last few years. But the effect may have been to shave a bit off an otherwise healthy growth rate, so the impact, they say, has been hard to see.

The U.S. still accounts for nearly a quarter of the world oil market, despite the fast pace of global economic growth.

China’s share has grown steadily for more than a decade, a major factor driving up prices. But China still uses less than 9 percent of the world’s oil.

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