The price of oil is up, and consumer confidence is down. But most economists don't seem terribly bothered by the impact of $50-a-barrel oil on the economy. They argue that consumer price index inflation remains low, and consumer spending is still strong. But economists shouldn't be so sanguine. Remember that consumer spending accounts for 70% of the economy. In the first quarter of the year, it grew at a 4.1% annual rate. But when oil prices took off last spring and people faced sticker shock at the pump as gas prices topped $2 a gallon, they cut back on other discretionary spending. In the second quarter ``soft patch,'' consumer spending grew at only a 1.6% rate, a dramatic fall from earlier in the year and pretty close to when the U.S. was in recession.
It's time to recognize that higher oil prices act as a heavy tax on consumers. That money, which flows to the Middle East and other countries, could be spent in the U.S. to generate growth, profits, jobs, and tax revenue.
It's also time to admit that America needs a serious conservation program to cut its energy use. It's true that the U.S. is much more energy-efficient today than in the 1970s, so higher oil prices have less overall impact on growth. And yes, real oil prices are still below their peak as well.
But let's not exaggerate our good fortune. Real oil prices are already back to the level of their last peak in 1990. Demand from China, political uncertainties in Nigeria, Russia, and the Middle East, and underinvestment in exploration all mean that oil prices will probably remain high for years. Futures contracts out to five months are $47 per barrel. For the previous 15 years, with only a few exceptions, five-month forward contracts traded in a narrow range around $20 per barrel. Crude-oil futures for next September are trading at close to $44.
A year ago economists were predicting that oil prices would fall sharply, down into the $30 range. Now the markets are saying $40 to $50. So tight and fragile are those markets that a small revolt here, a hurricane there, and we could see oil staying in the $50 neighborhood for quite some time.
Consumers are beginning to take note. Many are facing both rising gasoline prices and higher home heating costs at once. Home heating-oil prices are already up 25% from last year in the Northeast, and many homeowners are holding back, hoping prices will drop. If they don't, the economy may well hit another soft patch.
Not everybody, of course, will get hit equally hard. With personal wealth at all-time highs, higher stock dividends flowing, and house prices still rising in parts of the country, the top third or so of all families won't be crimped in their spending habits very much. In fact, many are reacting to this past summer's shocking prices at the gas pump by switching from truck-based sport-utility vehicles to new, smaller car-based SUVs, which get better mileage. Moreover, demand for high-mileage hybrid cars is soaring. There is a long waiting list for the new Ford (F) Escape hybrid SUV.
So yes, the markets are working their wonders, with higher oil prices finally pushing people to think about conservation. Detroit could do a lot more to help. It is two to three gener-ations of hybrids behind the Japanese and still hasn't a single model to match Toyota's (TM) sought-after Prius. Japanese makers are so far ahead, they are on the verge of making hybrid engines optional for nearly all their cars.
But no move on the part of the auto makers will save consumers from the pain of high energy costs in coming months. One of the few economists of stature to continually warn of the danger of higher oil prices is Federal Reserve Chairman Alan Greenspan. He, of course, speaks from experience. Greenspan has in previous decades had to deal with recessions and slowdowns that resulted from rising oil prices. He doesn't want to do it again. Neither should we.
By Bruce Nussbaum