Oil prices: self-fulfilling pessimism

Over the last two months the price of oil has gone up US$30 dollars a barrel and currently stands at US$110 . In the US there is the concern that the periods of stagflation evident in the oil crisis years of 1973 (oil prices up 400%) and 1979 (oil prices up 200%) are back to haunt the economy. James Surowiecki in The New Yorker mentioned that the recent increase in oil prices shouldn’t really have a significant impact on the economy for the following reasons:

* In the US petrol is a relatively small percentage of household spending.
* It is estimated that an increase in oil prices by $20 a barrel should equal only a 0.5% decline in GDP
* The current increase is not at the same level of previous spikes
* Not all price increases have an effect on growth eg. between 2002 and 2006 oil prices increased 150% yet the US economy grew at a high rate.

Research has shown that rising petrol prices have a notable influence on the level of happiness of American consumers. Petrol prices are probably the most visible prices in the market – every petrol station has them. Behavioural economist Dan Ariely has argued that the way we buy petrol watching the dollar counter ever increasing is essentially depressing. According to Surowiecki the danger at the moment is more psychological than economic. Some economists have suggested it is only when the price of a barrel of oil gets above US$130 that we will experience an oil crisis like those in the past.

Leave a Reply

Your email address will not be published. Required fields are marked *