Strategic Briefing | 2.25.2011 | Oil & The Economic Outlook

Rising Oil Prices Pose New Threat to U.S. Economy
New York Times/Feb 24
In the last week, oil prices have risen more than 10 percent and even breached $100 a barrel. A sustained $10 increase in oil prices would shave about two-tenths of a percentage point off economic growth, according to Dean Maki, chief United States economist at Barclays Capital. The Federal Reserve had forecast last week that the United States economy would grow by 3.4 to 3.9 percent in 2011, up from 2.9 percent last year.
Calibrating the Macro Effects of Higher Oil Prices: Results from the MA Model
Macroadvisers/Feb 24
Assuming no change in long-term inflation expectations, no monetary policy response, and no financial-market spillovers, the partial effects of the rise in oil prices can be estimated by scaling up or down the following simulation result generated from our model. An increase in oil prices of $10/bbl for one year starting in the first quarter of 2011 would:
•Reduce GDP growth by about 0.3 percentage point over the first half of the year and by 0.2 percentage point over the entire year.
•Headline PCE inflation would be about 0.1 percentage point higher over the year, and the unemployment rate about 0.1 percentage point higher.

Oil resumes surge, keeps stocks under check
Reuters/Feb 25
Analysts reckon the degree of vulnerability for G-10 oil importers is far less than that found in emerging economies. “Our own analysis indicates that net oil imports for many emerging economies in Asia are close to or greater than 5 percent of GDP,” said Andrew Cox, G-10 strategist at Citi.
Oil Prices: $10 = 25 Cents at the Pump
Deutsche Bank via WSJ MarketBeat/Feb 24
According to our analysis, a $10 increase in oil prices translates into roughly a 25 cent increase in retail gasoline prices. Every one penny increase in gasoline is then worth about $1 billion in household energy consumption. (In decimal terms, it is actually $1.4 billion.) Therefore, a sustained $10 increase in oil prices translates into $25 billion in additional household energy spending. Assuming this price rise crowds out spending elsewhere in the economy, effectively acting as a tax, means that a sustained $10 rise in oil prices reduces annual real GDP growth by 0.2%. Therefore, we would need oil prices to rise substantially from their current level and then remain elevated for some time before becoming more concerned about economic growth.
Here We Go Again–Oil Through US $100
AMP Capital Investors/Feb 24
My view has been that the world oil price will rise above US$100 a barrel this year on the back of strong demand growth relative to constrained supply. The turmoil in the Middle East has simply brought this forward. The world could probably live with US$100 oil, as consumers and businesses are now used to it. Just like Australians now assume that petrol prices north of one dollar a litre are normal. It would still leave world spending on oil well below its 2008 peak.

However, a continuing surge in the oil price – particularly if unrest in the Middle East spreads – could start to be more of a dampener on growth. Of course, rising oil prices will add to the inflationary boost already flowing through from higher food prices. However, rising oil prices like higher food prices also act as a tax on growth, as it cuts into discretionary spending power. This is particularly so in Asia where the oil intensity of GDP is generally greater than that in developed countries. So it’s too early to get overly worried now but if the oil price continues to surge then it will become more of a problem.
Oil May Rise as Mideast Turmoil Disrupts Supplies, Survey Shows
Bloomberg/Feb 25
Oil prices may rise from the highest levels in 29 months next week as violent clashes in Libya and tensions in other parts of the Middle East disrupt crude shipments from the region, a Bloomberg News survey showed. Twenty-three of 40 analysts, or 58 percent, forecast crude oil will climb through March 4. Nine respondents, or 23 percent, predicted prices will decline and eight estimated little change. Last week, 44 percent said futures would increase.
White House: Oil price shock wouldn’t ‘derail’ economy
The Hill/Feb 24
The White House does not believe a shock to oil prices will “derail” the economy but is closely monitoring the situation, a top White House economic official said Thursday. Austan Goolsbee, the chairman of the White House Council of Economic Advisers, told reporters that, while no one likes to pay more at the gas pump, the United States would be better able to handle spikes in the price of oil today than in decades past. “If you look at energy consumption per dollar of GDP in the economy now, it’s dramatically lower that it was in 1979,” Goolsbee said, referencing an era when oil prices did become a drag on the economy. “We’ve become substantially more energy-efficient.”
Fed’s Plosser-Would take big oil spike to hurt GDP
Reuters/Feb 23
It would take a significant and sustained rise in oil prices to seriously hurt U.S. economic growth, Philadelphia Federal Reserve Bank President Charles Plosser said on Wednesday.
“I think that oil would have to rise significantly more and stay there for a while to have dramatic effects on GDP growth,” he said in response to questions from reporters after giving a speech in Birmingham, Alabama.
Emerging markets less impacted by rising crude: JPMorgan
CNBC via MoneyControl/Feb 24
Crude oil prices hit two-year highs on Thursday amid continuing turmoil in many regions in the Middle East. However, Geoff Lewis, head of investment services at JPMorgan Asset Management believes a USD 10 a barrel rise in crude will not derail economic recovery in emerging markets. “Emerging markets may fall lesser than developed markets on crude price rise,” he says. Lewis feels a short-term spike in crude will not undermine the long-term fundamental story in emerging markets. If anything, developed markets have more to worry about. “The economic recovery in developed markets is at a greater risk with rise in crude,” he feels.
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