It has long been thought that high crude prices hinder the economy by demanding consumers to spend more on gasoline, leaving less disposable income for other things. However, America’s newfound success in oil production challenges old beliefs about the impact of higher crude prices on the U.S. economy.
In fact, the U.S. economy grew at its fastest rate in almost four years during the throughout the April-June quarter, despite notions that rising oil prices hurt the economy.
President Donald Trump has expressed his concerns with rising oil prices.
“We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices!” Trump tweeted on Thursday. “We will remember. The OPEC monopoly must get prices down now!”
Despite Trump’s concerns, the Organization of the Petroleum Exporting Countries agreed not to further increase oil output. Members of OPEC reached this agreement on Sunday in Algiers with non-members including Russia.
The committee said in a statement that is was satisfied “regarding the current oil market outlook, with an overall healthy balance between supply and demand.”
Oil prices are up approximately 40 percent in the past year. U.S. crude oil was trading at around $71 a barrel, and the international standard was approaching $80 a barrel.
The U.S. imports about 6 million barrels of oil a day. The U.S. has also doubled its oil production to more than 10 million barrels a day. The Energy Information Administration said that the U.S. reclaimed the title of world’s biggest oil producer this year, outperforming Saudi Arabia and Russia.
“Because the U.S. now is producing so much more than it used to, [the rise in oil prices] is not as big an impact as it would have been 20 years ago or 10 years ago,” said Michael Maher, an energy researcher at Rice University and a former Exxon Mobil economist.
Energy amounts to only about three percent of consumer spending. Some economists believe that a cutback in the other 97 percent creates losses for other parts of the economy, including the automobile, restaurant, airline, and resort industries.
“Higher oil prices are unambiguously bad for the U.S. economy,” said Philip Verleger, an economist who has studied energy markets. “They force consumers to divert their income from spending on other items to spending on fuels.”
According to Moody’s Analytics, every penny increase at the pump reduces consumer spending by $1 billion over a year. Gasoline prices have jumped up 24 cents in the past year, according to AAA, signaling a “clear-cut negative,” according to Ryan Sweet, director of real-time economics at Moody’s. However, Sweet indicates this price increase is not significantly harmful to consumers.
“Usually with gasoline prices, speed kills—a gradual increase (like the current one), consumers can absorb that,” Sweet said. Consumers have other factors on their side, including a tight job market, wage growth, better household balance sheets, and the recent tax cut.
As oil prices creep up, energy companies are increasing production to create an economic stimulus to counteract the higher prices on consumers. Investments in oil and gas accounted for about 40 percent of the growth in business investment in the April-June quarter this year.
This weekend, OPEC released its World Oil Outlook 2040 report. The organization claims that China and India will stimulate an increase in energy demand, and that oil will remain the biggest source of energy, despite a push for cleaner resources.
The U.S. will continue to advance as a crude producer, peaking in the late 2020s, which could hinder OPEC’s power to influence the oil market.
