From: Charles Stein, The Boston Globe
Published December 8, 2004 12:00 AM

U.S. Economy Shrugs off Soaring Oil Prices

Dec. 8—Despite a huge run-up in oil prices this year, the resilient American economy has continued to grow at brisk pace,


defying predictions of an oil-related slowdown.





The economy expanded at a solid 3.9 percent pace in the third quarter, and most forecasters expect similar growth in the


current quarter. Consumers continue to spend money on houses and cars and businesses continue to spend on equipment.





"It has been a surprise," said Richard DeKaser, chief economist at National City Corp. in Cleveland.





Oil prices began the year at about $32 a barrel, peaked in October at $55, and have since come down to about $42. In the late


1990s oil sold for less than $20 a barrel. Gasoline prices this year have climbed from $1.50 a gallon in January to $1.95


today. Heating oil prices have risen from $1.48 to $1.89 a gallon.





Analysts say the United States has weathered the storm because the economy has changed and because the spike in oil prices


came at an opportune time.





The most critical change involves America's use of energy. Simply put, the economy is roughly twice as energy-efficient as it


was in the early 1980s, the last time the nation experienced a sudden leap in oil prices. During the 1980s, in particular,


efficiency gains in everything from cars to appliances to factories allowed the economy to grow using far less energy than in


the past. The low oil prices of the 1990s halted the progress toward greater efficiency, but didn't reverse it. Over a


slightly longer period of time the economy's shift from manufacturing to service has further cut the nation's reliance on


oil.





At the household level, the change is just as stark. According to David Wyss, chief economist at Standard & Poor's, the


typical household in 1981 spent 8 percent of its budget on energy. That number dropped to 4 percent in 2002 and has since


risen to about 5 percent. Wyss compares this year's hike in energy bills to a tax increase: big enough to slow the economy a


bit, but not big enough to cripple it.





To be sure, more expensive oil has done some damage. The US economy will grow about 4 percent in 2004. Forecasters estimate


growth would have been closer to 4.5 percent absent the rise in oil prices. The impact of higher energy prices has been felt


most acutely among low-income and working class families. They spend a higher percentage of their budgets on energy than


their more affluent counterparts and they have no cushion to fall back on when prices rise sharply.





"Wal-Mart shoppers are hurt more than Neiman Marcus shoppers," said Wyss. In fact, Wal-Mart, which has suffered from weak


sales for months, has repeatedly blamed higher gasoline prices for its troubles.





In its recent "Beige Book," its regular report on the US economy, the Federal Reserve made a similar point. "Demand for


premium merchandise has been noticeably stronger than for lower-priced lines, with some contacts suggesting that lower-income


households might have been more greatly affected by high energy prices."





The US economy has changed in another important way: It is more inflation-resistant than it used to be. In the 1970s and


1980s soaring oil prices quickly translated into higher prices throughout the economy as businesses passed their higher costs


on to customers. That is not happening today. Inflation has been running at about a 2 percent annual clip, even though oil


prices are up significantly. "Companies are mostly eating the higher energy costs," said Mark Zandi, chief economist at


Economy.com, a Pennsylvania forecasting firm.





The airline industry offers an interesting case study. Over the past 18 months the price of jet fuel climbed from 72 cents a


gallon to $1.55 a gallon. Yet over that same time, fares have barely budged. "The airlines have made repeated attempts to


raise fares, but very little of it actually stuck," said Daniel Kasper, an airline consultant based in Cambridge. Kasper


blames the airlines' dilemma on intense competition, a phenomenon that is hardly unique to the airline business.





Energy prices began their run-up in the spring. The US economy was growing briskly at that time, which made expensive energy


easier to absorb, say analysts. "We had a lot of momentum coming into this period," said Nariman Behravesh, chief economist


at Global Insight in Waltham. Behravesh notes that the current spike in energy prices is the result, not of a cutoff in


supply, but of strong global demand, especially from the United States and China. "You could say this is a good price


increase," he said.





Oil producers apparently agree. The Organization of Petroleum Exporting Countries is considering raising its target price for


oil to between $30 and $40 a barrel, up from the current $22 to $28 range. The rationale: the world economy can tolerate


higher prices better than it once could.





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