New York, December 23, 2005--The energy shock to economic growth will be felt worldwide through the increasing global imbalance between high investment and low consumer spending, according to an analysis by The Conference Board.
The steady rise of global commodity prices since 2002 has been led by spiraling oil prices. There have been a number of additional factors motivating these increases: exceptionally low interest and inflation rates, a surge in emerging market demand led by heavy investment in China, the acceleration of global manufacturing activity in 2004, and a shortfall in natural resource investment for almost 20 years.
"The relationship between U.S. crude oil stocks and oil prices has become unhinged during the past year, probably due to new demand/supply factors heavily influenced by China," says Gail D. Fosler, Executive Vice President and Chief Economist of The Conference Board. Her analysis appears in StraightTalk, a newsletter designed exclusively for members of The Conference Board's global business network.
These imbalances have generated major crises in the past, both in the U.S. and abroad, although there are important offsets-particularly by deep discounting in other prices-today. Despite recent dips in energy prices and holiday promotions, consumers across the U.S. will be hard hit in the short term.
Says Fosler: "The recent energy shock is reminiscent of the 1970s. Rising gasoline prices have taken the energy share of consumer spending from about 4% in 2001 to 6.5% this September-the highest level in more than 20 years."
While oil prices hit new highs during the recent hurricane crises, the recent surge was not sustainable and oil prices have already declined again. But current oil prices are still well above the level consistent with their long-term fundamentals. In the coming months, oil prices should continue to fall toward levels more consistent with long-term economic fundamentals.
The effect of lower oil prices on natural gas and gasoline prices is based in part on their relationship to crude prices, since natural gas prices tend to lag crude oil prices. When crude prices rise sharply, natural gas prices spike briefly and then begin to decline.
"Still, even if oil prices fall to $40 a barrel, natural gas prices are likely to remain at about $7 per MMBTU, which is still above the prevailing price of the last 10 years," says Fosler.
The same trend is pushing gasoline prices. Refiners' margins have been increasing steadily as crude oil prices rise. The shortage of refining capacity is due, at least partly, to low crude oil prices over the past 15 years, which have depressed refiners' margins. Today, margins are up, as are crude oil prices. As with natural gas, however, even a sharp drop in oil prices would produce gasoline prices that are in the range of $2 a gallon, which is above the prevailing level of recent years.
Meanwhile, non-food, non-energy prices in the Consumer Price Index have continued to slow since 2001.
Estimates from The Conference Board show that a permanent increase of 50 cents per gallon in the price of retail gasoline will reduce the level of real personal consumption by 1% to 1.5% within a year.
Consumers have benefited from low interest rates and home equity refinancing, trends that have supported spending power in the face of relatively modest wage growth. Now, rising interest rates and the magnitude of the hurricane-related gasoline shock appear to be taking their toll. Auto sales are likely to be down 30% year over year and 4.5% from the third quarter.
