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Friday, February 24, 2012

Oil Prices and the Economy

by Calculated Risk on 2/24/2012 10:18:00 PM

Once again we have to consider the impact of high oil prices on the US economy. Bloomberg reports brent crude futures are up to $125.47 per barrel, and WTI is up to $109.77.

From the WSJ: Gas Prices Annoy Consumers but Don't Dim Outlook Yet

Prices at the pump have risen in recent weeks as tensions with Iran have sparked fears of a supply disruption, driving up the cost of crude oil. Prices of crude hit a nearly 10-month high on Friday, rising $1.94 a barrel to close at $109.77 on the New York Mercantile Exchange, their highest level since early May. Nationally, the average price of a gallon of regular gasoline hit $3.647 on Friday, according to the auto club AAA, up nearly 27 cents from a month earlier and up 11.8 cents in the past week.
"Consumers are not as concerned with the current level of gas prices as they were in past episodes," said Jonathan Basile, an economist with Credit Suisse.
When oil prices are increasing, I usually turn to Professor Hamilton's blog. In earlier research, Dr. Hamilton showed that prices had to rise above previous prices to be a significant drag on the economy. Last August he wrote: Economic consequences of recent oil price changes
In my 2003 study, I found the evidence favored a specification with a longer memory, looking at where oil prices had been not just over the last year but instead over the last 3 years. My reading of developments during 2011 has been that, because of the very high gasoline prices we saw in 2008, U.S. car-buying habits never went back to the earlier patterns, and we did not see the same shock to U.S. automakers as accompanied some of the other, more disruptive oil shocks. My view has been that, in the absence of those early manifestations, we might not expect to see the later multiplier effects that account for the average historical response summarized in the figure above. If one uses the 3-year price threshold that the data seem to favor, the inference would be that we'll do just fine in 2011:H2, because oil prices in 2011 never exceeded what we saw in 2008.
So far gasoline prices aren't above the 2011 peak levels, although they are getting close. I'm not sure 2008 counts since that is more than 3 years ago.

Another post from Hamilton two days ago: Crude oil and gasoline prices. Just something to think about ...

Note: The graph below shows oil prices for WTI; gasoline prices in most of the U.S. are impacted more by Brent prices.

Orange County Historical Gas Price Charts Provided by