New York, October 15--Surging crude oil prices have been grabbing headlines for months – but so far, they haven't held back the economy. That may be about to change.
Crude oil's move above $50 a barrel last month may mark the point where higher oil prices begin to take a greater toll on growth. According to 54 economists who participated in The Wall Street Journal Online's economic forecasting survey, a sustained move into the range of $50 to $59 a barrel – a move that lasted for a complete quarter -- would force them to shave their gross-domestic-product forecasts for that quarter by one-half point.
"Rising oil and energy costs and their negative effects on economic growth, inflation and profits constitute the biggest risk to [the economy] since the bursting of the stock-market bubble in 2000-2001," said Allen Sinai of Decision Economics in New York. He added that "higher energy costs are here to stay, and that has to subtract growth and could cause core inflation to pick up."
So far, the move to $50-plus oil hasn't lasted long enough to cause economists to dial back their forecasts to a large degree. Crude first settled above $50 a barrel in futures trading in New York early this month.
Indeed, in the October forecasting survey, economists lifted their estimates of third-quarter growth to a 4.0% inflation-adjusted annual rate, from the 3.6% average forecast they made in the September survey. Forecasts for fourth quarter GDP, were nudged down to 3.8% from 4.0% in September's survey. Over the first half of 2005, economists expect growth of around 3.6%. (GDP is the total value of all goods and services produced in the economy.)
The economists estimated that crude oil in the $40 to $49-a-barrel range shaves their GDP forecasts by just 0.1 percentage point. They said a rise into the $60-to-$69 band would lead them to mark their forecasts down by nearly one percentage point. Crude-oil prices have traded above $40 a barrel in New York since July.
One reason that economists don't appear to be making larger downward adjustments for soaring crude just yet is that some expect futures to retreat closer to what economists call a more sustainable level of $40 to $45 a barrel. They also say some of the speculation that is likely at work in the oil rally will ultimately shake out of prices. "If there's a lot of speculative activity, a lot of that doesn't get transferred to the bottom line," said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C.
Although oil has climbed to records this month, it's also important to note that in practical terms, oil has been more expensive in the past. Adjusted for inflation, oil traded at more than $80 a barrel in the early 1980s.
Some analysts and politicians have called for the U.S. to open its Strategic Petroleum Reserve, which holds 670 million barrels of oil, in order to relieve supply pressures and help drive down prices. The U.S. has made emergency loans from the reserve to a handful of refiners to make up for supply disruptions caused by Hurricane Ivan, but those loans have done little to cool the market.
In the survey, many economists urged against using the petroleum reserve to damp price gains. Thirty-eight percent of those surveyed say that the government shouldn't use the reserve in an effort to intervene in the oil market, while 27% said they feel that the U.S. should cease buying oil to fill the reserve. About 19% said the government should go ahead and release some of its strategic inventory into the market.
Higher commodities prices may be starting to eat into corporate profits. Airlines and shipping companies are particularly vulnerable to high oil prices, and companies as diverse as Coca-Cola, Colgate Palmolive and Wendy's International have complained that rising commodities prices, from pricier beef and sugar to more expensive cardboard, are cutting into profits.
