Strategic Briefing | 4.12.2011 | Energy Prices & The Economy

Despite New Risks, Global Recovery Seen Gaining Strength
IMF World Economic Outlook | April 11
World real GDP growth is forecast to be about 4½ percent in 2011 and 2012, down modestly from 5 percent in 2010. Real GDP in advanced economies and emerging and developing economies is expected to expand by about 2½ percent and 6½ percent, respectively. Downside risks continue to outweigh upside risks. In advanced economies, weak sovereign balance sheets and still-moribund real estate markets continue to present major concerns, especially in certain euro area economies; fi nancial risks are also to the downside as a result of the high funding requirements of banks and sovereigns. New downside risks are building on account of commodity prices, notably for oil, and, relatedly, geopolitical uncertainty, as well as overheating and booming asset markets in emerging market economies. However, there is also the potential for upside surprises to growth in the short term, owing to strong corporate balance sheets in advanced economies and buoyant demand in emerging and developing economies.

IEA: Oil Market to Tighten Further
The Wall Street Journal | April 12
The oil market looks set to tighten further this year, with oil inventories shrinking as supply disruptions and political tensions in the Middle East and North Africa look set to persist for months, the International Energy Agency said Tuesday. However, although today’s supply picture could imply rising prices, there are preliminary signs that the current high cost of oil may already be reducing demand growth, the IEA said. “The surest remedy for high prices my ultimately prove to be high prices themselves,” it said.
Gas Prices Rise, and Economists Seek Tipping Point
The New York Times | April 11
Gas prices are approaching record highs, but so far most Americans do not appear to be drastically cutting back their driving or even their spending as they did in 2008. The question, economists agreed, is what happens if prices continue to go up and remain high. Prices for a gallon of regular unleaded gas are topping $4 at more service stations nationwide, revisiting the bleak territory of three years ago, when the average price for a gallon of regular gas reached a peak of $4.11 on July 17, 2008, according to the Oil Price Information Service… “Once we cross the $4 threshold, the pain will become more palpable, and it is going to show up more noticeably in the reduction in future consumer spending,” said Bernard Baumohl, the chief global economist for the Economic Outlook Group. He predicted that “spending on discretionary goods will be diminishing as the price of gasoline keeps moving higher.”
Rising oil prices beginning to hurt US economy
Associated Press | April 12
Just when companies have finally stepped up hiring, rising oil prices are threatening to halt the U.S. economy’s gains. Some economists are scaling back their estimates for growth this year, in part because flat wages have left households struggling to pay higher gasoline prices. Oil has topped $108 a barrel, the highest price since 2008. Regular unleaded gasoline now goes for an average $3.69 a gallon, according to AAA’s daily fuel gauge survey, up 86 cents from a year ago… “The surge in oil prices since the end of last year is already doing significant damage to the economy,” says Mark Zandi, chief economist at Moody’s Analytics.
Pumped Up?
The New Yorker | April 11
High oil prices are generally bad for the U.S.—oil spending goes largely to foreign producers, leaving less money for American goods and services—but if you look just at the dollars involved the terror they inspire is somewhat mysterious. Gas is a relatively small percentage of most household budgets, and prices are now about eighty-five cents a gallon higher than they were twelve months ago, which translates into a few hundred dollars more a year. That’s not trivial, particularly for lower-income Americans, but it’s not devastating. In fact, it’s less than the increase in income that most Americans will get this year as a result of the new payroll-tax cut.
Still, few things loom as large in the public imagination as gas prices, which have an unusual, and much studied, ability to make people feel poorer. Last month’s drop in consumer confidence was attributed almost entirely to the spike in gas prices, in line with a 2007 study, by the economists Paul Edelstein and Lutz Kilian, showing that spikes in oil prices have often depressed public sentiment in the past.
As OPEC sleeps, oil nears the tipping point
MSN Money | April 11
The trouble is OPEC — the cartel that holds the world’s spare production capacity — doesn’t seem worried as soaring crude oil pushes the economy to the brink. Consumer confidence is already plunging fast. Instead of reassuring statements and a proactive policy stance, we’re getting just the opposite. Iraq’s deputy prime minister, along with the oil minister of the United Arab Emirates, indicated to a conference in Paris recently that OPEC saw no need to respond the latest price rise by increasing output. The minister, Hussain al-Shahristani, said, “We have not seen any serious impact on world growth.” And thus, they don’t feel like they need to act, since oil at $113 only further pads the coffers of oil producers in the Middle East and elsewhere. Deutsche Bank economists have flagged oil at $125 a barrel as the economy’s breaking point, a level that would push us back into recession. We’re getting awfully close. Nigeria is the flashpoint that could send us over the edge. Presidential elections are due there on April 16 and gubernatorial elections on April 23. Barclays Capital analyst Helima Croft notes that this year’s election is “proving to be more polarizing along regional and religious lines than past contests.” And given that the past two elections — in 2003 and 2007 — were marred by rises in oil thefts and attacks on oil pipelines and other infrastructure, it’s likely that we will see similar violence in the days to come.
West Texas Intermediate Light Crude