PARIS (Reuters) - Costly crude oil, which recently neared $100 a barrel, may no longer be the certified economy killer the West dreaded in the 1970s, but it could still produce a nasty cocktail if mixed with the world's other economic woes.
Many economists believe crude's latest surge, which has fuelled renewed talk of inflation and stagnation, is still not enough on its own to derail the economy of the United States and others among the world's richest countries.
But the latest leg in oil's five-year climb coincides with a U.S. housing slump and a subprime mortgage defaults crisis that has hit bank profits, triggered a global credit crunch and proved no boom is never-ending. Food prices are also soaring.
PARIS (Reuters) - Costly crude oil, which recently neared $100 a barrel, may no longer be the certified economy killer the West dreaded in the 1970s, but it could still produce a nasty cocktail if mixed with the world's other economic woes.
Many economists believe crude's latest surge, which has fuelled renewed talk of inflation and stagnation, is still not enough on its own to derail the economy of the United States and others among the world's richest countries.
But the latest leg in oil's five-year climb coincides with a U.S. housing slump and a subprime mortgage defaults crisis that has hit bank profits, triggered a global credit crunch and proved no boom is never-ending. Food prices are also soaring.
That could put paid to what MIT economics professor Olivier Blanchard calls the 'good luck' factor that, along with many other changes in how economies function, has prevented a re-run of the stagflation synonymous with the oil crises of the 1970s.
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Right now, in financial markets at least, attention is riveted on the credit crunch that took hold in August, prompting the U.S. Federal Reserve to cut interest rates to shore up the economy and the European Central Bank to hold off on rate rises.
"Oil's not causing anything like the panic that it did as it set new records at much lower levels," says Rob Carnell, chief international economist at ING, a Dutch bank. "The U.S. macroeconomy is not yet screaming in pain -- at least not due to oil prices -- and asset prices seem fairly unresponsive."
Americans are still buying sports utility vehicles (SUVs) and other fuel-guzzlers as happily as a year ago, judging by October auto sales data, says James Hamilton, economics professor at the University of California, a prominent oil economics researcher.
He argues it would take oil prices nearer $150 per barrel before the pain reached the American public, via retail energy prices, on a scale that causes a significant drop in consumption that in turn hits profits and business investment.
But, as Hamilton notes, oil is not the only problem. The danger comes from the housing slump and wider credit crisis and how they hit confidence and consumption.
"It would not take much to turn the resulting slowdown into an outright recession. For this reason, I'm watching auto sales and consumer sentiment particularly closely."
U.S. crude (CLc1: Quote, Profile, Research) has risen some 25 percent since early August in the latest spurt. But the price has been climbing since early 1999, when it was just $12, and the rise is nearly four-fold in the last five years.
That longer-term rise did not stop the global economy growing at close to five percent annually for five years from 2002 to 2006 though, the best run in more than three decades.
OUT OF LUCK
Blanchard and a growing number of economists no longer think the world can simply slip back into the stagnation or the rampant inflation of the kind that followed the Middle East oil supply crises of 1973 and 1979-80.
Oil intensity -- the amount of oil produced per unit of GDP -- has lessened, more so in Europe than the United States. Wage deals no longer soar like they used to when energy costs rise, monetary policy has improved and, in recent years, there was little else to endanger the economy's bull run.
That's the main thrust of economic analysis in recent years.
What has yet to happen, argues Lutz Kilian of the University of Michigan, is a surge in retail energy prices such as fuel for cars and home-heating, things that affect consumption.
"A 1 percent increase in energy prices from one month to the next lowers real U.S. consumption after a year by 0.15 percent," says Kilian, a researcher at the forefront of changing theories about oil's impact on the economy.
NO RULE OF THUMB
While the mood remains sanguine, it is tinged with doubt because other negative factors are in play and central banks are caught between a rock and a hard place.
The Fed is cutting rates but acknowledging inflation is still a worry and the ECB is sounding the alarm about inflation risks but holding off on rate rises due to the uncertainty caused by the subprime crisis and credit crunch.
Ray Barrell of the National Institute of Economic Research in Britain reckons the Fed is playing with fire as far as the inflationary risks are concerned and that the ECB should not drop its guard either.
A $10 oil price rise would reduce U.S. output growth by 0.1 per cent for a couple of years and have slightly less impact in the euro zone, he says.
In both cases inflation would be about 0.2 percentage points higher than it would have been in the U.S. for three years or so, and marginally less than that in the less oil-thirsty eurozone.
Barrell and colleague Olga Pomerantz, along with the OECD and IMF, have created rules of thumb that many investors still rely on for ballpark predictions about the impact of oil.
The bottom line of such models is that the GDP pain builds up over time while inflation is more frontloaded, and the effects are greater in the United States than Europe or Japan.
Within Europe, former communist countries such as Poland, the Czech Republic or Hungary are far more heavily hit in terms of growth and especially inflation, Barrell suggests.
"Such models are of course overly simplistic if not downright wrong," ING's Carnell says of these models generally.
As long as oil prices are primarily on the rise because of surging demand from the likes of China, the risks of damage from oil alone are less than if the price rise is caused by supply crises due to conflict in the Middle East, Hamilton says.
"If the tanks start rolling or missiles start flying in the Middle East, my worry factor is going to soar along with the price of oil," he says.
(Reporting by Brian Love and Emily Kaiser, editing by Anthony Barker and Gerrard Raven)
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