From: Bill Sulon, The Patriot-News, Harrisburg, Pa.
Published October 25, 2004 12:00 AM

Crude Oil Prices Threaten U.S. Economic Growth

Oct. 25—Consumer prices, stable in south-central Pennsylvania and nationwide over the past several years, could increase in response to the recent surge in crude-oil prices, economic experts say.


The record high price for crude oil — which topped $55 a barrel last week — could quicken the pace of inflation and stunt job growth over the next year, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. That, in turn, could cut into the growth of the nation's gross domestic product, the total value of goods and services produced in the country, he said.


"Oil prices going up $10 a barrel probably knocks 1 percent off GDP," said Hoffman, who noted that crude oil was selling for $40 a barrel over the summer. "If you equate that to employment, that's 500,000 jobs that don't get created that otherwise would get created."


The cost of 72 goods and services tracked in central Pennsylvania had risen 1.6 percent at the end of September from three months earlier and 5.8 percent from a year ago. Gasoline prices, stable most of the summer, shot up at the end of September and are 8.9 percent higher than at the end of June. Gasoline prices, which continue to increase at the start of the fourth quarter, are 24 percent higher than a year ago.


"October will be a terrible month for gasoline prices," Hoffman said.


Normally, gasoline prices start to fall off in autumn and winter as demand decreases, and that traditional decline in fuel prices is typically offset by higher heating costs in the winter months, he said.


"This year there doesn't appear there will be an offset," Hoffman said, adding that consumers and business owners should prepare for a short-term "double whammy" of higher gasoline and energy costs.


The cost of electricity, controlled for nearly a decade by the state Public Utility Commission, could go up by as much as 9.8 percent in January, a month after state caps on transmission and distribution are set to expire. Rates for generating electricity are to remain capped until 2009. All the caps are part of the state's 1996 effort to deregulate the electricity industry.


If the PUC approves PPL's request for the entire 9.8 percent rate increase it wants, the monthly electric bill for the average residential consumer would increase to $51.87, from $47.16.


Natural-gas prices have been stable since March, but "much volatility," such as the impact of four recent hurricanes in Florida and "a very tight balance of supply and demand," could drive up prices this winter, said Deborah Leuffen, spokeswoman for UGI Utilities Inc.


The utility, a major supplier of natural gas in the region, will know in December if a rate increase is necessary, Leuffen said.


Even if the price of natural gas remains unchanged for the rest of the year, it is 34 percent higher than a year ago.


The Federal Reserve Board has been trying to gradually raise interest rates from four-decade lows without causing inflation to surge. The rising cost of energy may force the Fed policy-makers to stagger future rate increases over a longer period of time, said Jacob DeRooy, economics professor at Penn State Harrisburg.


In quarter-point increments, the Fed this year has raised overnight interest rates banks charge by three-quarters of a percentage point, to 1.75 percent. The federal funds rate is a barometer for other, higher interest rates charged to consumers and businesses.


"One issue that had not been anticipated in the development of monetary policy was the dramatic rise in energy prices," DeRooy said. "Although it wasn't terribly unique — basic commodity prices have been rising for a year without grabbing headlines — there has been reason to be concerned about inflation."


DeRooy said the annual inflation rate nationally could increase to about 3 percent from 2 percent due to the rising energy prices as businesses pass along the higher cost of manufacturing, transportation and utility costs to consumers.


"This unanticipated increase in fuel and energy prices will certainly impact future consumer prices," he said.


However, the surge in energy prices is likely to have far less of an impact on the economy than the oil shocks of the 1970s, Federal Reserve Chairman Alan Greenspan said last week.


Greenspan predicted that the global economy will adjust to the recent upswing in prices by boosting energy exploration and production and by increasing fuel efficiency. But he conceded that the transition period could feature unexpected bumps.


"We and the rest of the world doubtless will have to live with the uncertainties of the oil markets for some time to come," Greenspan said in remarks to the National Italian American Foundation in Washington.


Greenspan noted that even with the recent jump in oil prices, energy prices are still only three-fifths as high, after adjusting for inflation, as they were at their all-time peak in February 1981. He said this means that the overall impact on the economy should be lower this time around than during that period, when the oil shocks of the 1970s and early 1980s were enough to push the country into a series of recessions.


So far this year, Greenspan said, the rise in energy has probably trimmed the gross domestic product by about 0.75 of a percent, far less than the shocks of two decades ago.


However, Greenspan warned, "Obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher."


The Associated Press contributed to this story.


© 2004, The Patriot-News, Harrisburg, Pa. Distributed by Knight Ridder/Tribune Business News.


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