Rising oil prices and its impact on the U.S. economy

On Friday oil retreated after a false rumor circulated on Thursday about a Saudi oil pipeline exploding was confirmed as untrue. Light sweet WTI crude fell to $107.89 a barrel while Brent crude lowered to 124.82 a barrel.

One of the widely reported obstacles that the U.S. economy faces in 2012 is the rising cost of oil. Wall St. bears continue to refer to the growing risks to the economy from rising oil while Wall St. bulls tend to downplay these remarks, claiming that retailers’ profits are at an all time high, consumer discretionary spending levels are still good, and rising oil costs are not the “new Greece.”

It is true that some of the better than expected retail numbers  are due in part to unseasonably warm winter weather across the United States that resulted in higher demand for merchandise and increased spending. This is good news for retailers’ bottom line and economic reports.

The U.S. economy appears to be on solid footing as evidenced by a steady stream of strong economic data, including a better employment picture. Still, it is indisputable that more dramatic rise in oil has the potential to stall a U.S. recovery. Five dollar gas prices will pose serious risks to the U.S. economy.

 A commentator this morning on CNBC noted that for every penny increase in gas, it results in a 1 billion loss in discretionary spending in the U.S. economy. That figure has been cited in the past from Bernard Baumohl, chief global economist at Princeton New Jersey’s Economic Outlook Group. Another poignant figure to consider is this one: For every $10 increase in the price per barrel of oil, it results in a .25 cent increase in gasoline retail prices.

According to AAA,  on Friday the national price of gas was $3.74 a gallon which is .29 cents higher than last month and .31 cents higher than last year.

Some of the reasons oil prices have increased are due to tensions in the Middle East with Iran and strong economic data in the U.S. which results in oil costs rising to meet growing demand. Gasoline prices also tend to increase in the spring as a more expensive summer grade comes in the market.

On Thursday President Obama said in a speech that oil and gas production is at its highest level since 2003. Obama wants to develop new cleaner energy sources and end 4 billion in oil subsidies while encouraging companies to develop clean energy sources. 

One of the clean energy sources that Obama is referring to includes natural gas which is plentiful in the U.S., near a 10 year low in price, but lacks a comprehensive infrastructure to make it widely available as an alternative to crude oil. There are also political forces at work that are attempting to limit the development of clean energy alternatives such as natural gas.

Nonetheless, during Obama’s Saturday radio address, he said that Detroit automakers are planning to build cars that will average nearly 55 miles per gallon by 2025, double the current mileage standard.

Next Week

Investors will pay close attention to U.S. employment numbers to better determine the direction that the market is headed. On Wednesday ADP numbers from the private sector will be released. Analysts from Reuters estimate that 200,000 jobs will be added. On Thursday jobless claims will be released. On Friday the widely watched nonfarm payroll number will be released.

Also, elections are currently underway in Russia where Vladimir Putin is expected to win.

** Corrected- earlier today it was posted here that for every penny increase of oil, it results in a 1 billion dollar loss in discretionary spending. The correct version is for every penny increase in gas (not oil), it results in a 1 billion dollar loss in discretionary spending in the U.S. economy.

 

 

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