Rising Oil Prices Raise the Specter of a Double Dip


A sustained and significant rise in oil prices could derail the U.S. economic recovery by stirring inflation and putting the brakes on spending.

Traders worked on Wednesday in the New York Mercantile Exchange’s crude-oil options pit. Oil futures touched $100 a barrel before pulling back.


Oil futures touched $100 a barrel at the New York Mercantile Exchange Wednesday—the highest since before the financial crisis hit in late 2008—before pulling back. Pricier oil drives up the costs of everything from gas at the pump to the raw materials used to make nylon and food packaging. That could mean higher inflation and prompt consumers, who lately have shown more willingness to spend, to cut back their purchases.

WSJ’s Paul Vigna reports violence in Libya has pushed crude oil prices over $100 per barrel. Meanwhile, eyes are turning to Saudi Arabia on fears that tensions may spread to the oil-rich country as well.

Oil prices have risen 7.35% since the beginning of the year, while gasoline futures have risen 10.67%.

The question now is whether turmoil in the Middle East and Northern Africa could lead to a sustained cutback in production or delivery disruptions that could drive those prices much higher and push the U.S. as well as other countries back into recession. Supply-driven oil shocks, like the ones that came with the 1973 oil embargo and the 1979 Iranian revolution, were factors in past recessions.

Most economists reckon that the price of oil would have to rise to at least $120 a barrel, and stay there, to threaten the recovery.

“It’s definitely unhelpful,” says Comerica economist Dana Johnson of the rise in energy prices. “But we would really need a far more massive increase in crude prices for me to really start worrying.”


In part because it is driven by something other than increased demand, the rising price of oil is unlikely to prompt the Federal Reserve to move more quickly toward raising short-term interest rates, now near zero, or otherwise moving to tighten credit. That could change if higher energy and goods costs begin to seriously feed into prices of other goods and services. But with unemployment high, a large share of U.S. manufacturing capacity still idle, and little sign that public or market expectations for inflation are moving up, Fed policymakers see the chances of inflation rising by more than their informal target of about 2% this year as remote.

Treasury Secretary Timothy Geithner, speaking at a meeting in Washington hosted by Bloomberg News, said policymakers are in a good position to handle the surge in oil and other commodities prices. “Central banks have had a lot of experience in managing those things,” he said. “It’s not rocket science.”

Crude-oil futures traded above $100/barrel for a second day as the Libyan uprising continues to spook investors, and people start to look at the broader economic effects of $100 oil. Donna Kardos Yesalavich, Jerry DiColo and Paul Vigna report.

The biggest risk to the economy from climbing energy prices stems from U.S. consumers, says James Hamilton, an economist at the University of California-San Diego. Collectively, they use about 140 billion gallons of gasoline a year, he notes, so the roughly 30-cents-a-gallon increase in pump prices over the past three months adds up. “That’s a significant drain on consumer budgets that could put a drag on the recovery,” he says.

Transportation firms are among the most exposed to energy prices. Airlines have been trying to raise ticket prices as consumers and businesses push back. Trucking companies, on the other hand, often find it easier to pass on rising fuel costs to their customers through surcharges.

“We just kind of pass our costs” through, says Adam Allen, owner of Pocahontas, Iowa, trucking firm Allen Transport. Customers “understand what’s going on.”

Chemicals companies also appear to be passing on some higher petroleum costs to customers. In January, wholesale chemicals prices were up 8.4% from a year earlier, according to Labor Department figures.

Higher energy prices often hurt consumer-oriented companies, particularly sellers of discretionary items, such as cars, movie tickets and big-screen televisions. As consumers spend more at the pump, they often compensate by cutting back on purchases they don’t view as strictly necessary.

Meanwhile, food prices are rising, which could also cut into discretionary spending. “One of the main risks to the economy right now is an energy price shock, especially if it’s paired with a food-price shock as well,” says Barclays Capital economist Dean Maki.


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