How hard will oil price hikes hit US economy?

After a temporary fall in June, the oil prices soon rose again and stayed high until now. On August 29, the price of crude oil futures at New York Mercantile Exchange hit a new record of 70.80 US dollars per barrel during Asian trading hours.

High oil prices once led to depression

Soaring oil prices brought recessions because they hurt the economy through five channels. First, higher energy prices weakened consumers' purchasing power. In the United States, a country of automobiles, the impact of soaring oil and fuel prices is even more obvious; second, high energy prices raised core inflation rate (ignoring chances in food and energy prices) through high energy-consuming goods and services; third, high energy prices cast a negative impact on investment and consumption by worsening financial environment, raising yield rate on bonds, interest rate and reducing stock prices; fourth, high energy prices squeezed the profit margin of high energy-consuming enterprises, particularly for airliners; fifth, the high prices posed pressure on enterprise and individual confidence and dampened consumer's purchasing enthusiasm to a certain degree.

Various factors weakened impact of price hikes

One of the biggest differences is that Americans drew lessons from past experience and strengthened energy-saving measures. Based on the value of US dollars in 1996, the energy consumption for per-unit GDP in 2002 was only 46 percent of that in 1970. As a result, although the country's total energy consumption is rising, its negative impact on economy is diminishing.

Secondly, despite the soaring oil prices, inflation is still kept under control. The CPI rose 0.5 percent in July, 3.1 percent higher than the same period of last year. This is largely driven by the 3.8-percent rise of energy prices, but food prices only increased 0.2 percent, the slowest growth since July 2003. Ignoring oil and food, the core CPI increased only 0.1 percent in July, at the same level with the previous two months. Garment prices dropped 0.9 percent, being a main factor offsetting core CPI rise, and this is chiefly due to import of low-price commodities.

Thirdly, although the Federal Reserve has raised short-term interest rates ten times, the long-term rates remained low. The ten-year bond yield only stood at around four percent and the mortgage loan rate was kept under six percent. This unusual phenomenon, analysts say, is chiefly due to excessive global savings and ample dollar capitals from other countries, against a background of increased foreign exchange reserves in Asian countries to guard against financial crisis, as well as increased domestic savings in developed countries, including Japan and Germany, to cope with aging. Therefore, the United States was able to borrow large amounts of funds from international financial markets to boost its real estate and automobile sectors.

Fourth, although Americans were unhappy about the skyrocketing oil price, their enthusiasm in spending was never dampened. An important reason was the wealth effect brought by increased stock and real estate prices, as well as the low-interest loans after house appreciation, which reached as much as 55 billion US dollars during the second quarter of this year.

The aforementioned factors cushioned the shock of oil price hike on US economy, but the price soared so high that it equaled about 70 billion US dollars in government taxation, which must show itself in the economy. In July, Alan Greenspan testified before the Congress that the oil price hike in 2004 resulted in GDP loss of 0.5 percentage point that year, and the figure for this year would be 0.73 percentage point with the whole-year GDP growth expected between 3.75 and 4 percent.

The assessment is subject to sudden changes in oil demand-supply relations, in which much uncertainty exists. An optimistic expectation is a price near 50 US dollars per barrel at year-end, but unbalanced demand and supply caused by eventualities can never be ruled out. According to calculations by US economic websites, if the price reaches 75 US dollars per barrel, the US economic situation will be reversed.

New policy focuses on energy saving

Bush said the act would not solve the challenge of energy overnight, since most serious problems are built up through dozens of years. The public opinions are divided on the act. Supporters say it will help to address the energy issue while environmentalists say it is nothing but a new gift to energy companies, without any new measures for encouraging renewable energies. Anyway, the measures proposed there can serve a reference to other countries.

By People's Daily Online