17-Jan-2012 - A rule of thumb for oil prices and growth

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As my colleague Steven Mufson reports today, tensions with Iran are putting upward pressure on crude prices — and oil was already at a record high in 2011. Analysts are now fretting that oil could kneecap the fragile recovery. So is there a good way of estimating the effects of pricier oil? The Strait of Hormuz, where all the excitement is taking place. (MARWAN NAAMANI/AFP) Yes. According to a U.S. Energy Information Administration analysis, a 20 increase in the cost of a barrel of oil — roughly what we saw last year — is estimated to pare about 0.4 points off GDP growth in the first year alone and boost unemployment by about 0.1 percentage points. So if Iran threatens to close the Strait of Hormuz and oil prices dr dre beats studio white headphone start ratcheting upward, that could put a very noticeable dent in growth. Worse still, oil shocks tend to have long-lasting effects. The EIA estimates that a 20 price increase continues biting into the economy for at last another year thereafter. James Hamilton, an White Studio Steve Jobs Apple Headphone economist at the University of California, San Diego, has suggested that the consequences of a price spike can persist for several quarters, as the resulting slowdown in consumer spending takes some time to ripple through the economy. That’s true even if the spike is only temporary and recedes quickly.Here’s another way of looking at it: In 2011, the United States paid about 125 billion more for oil imports than it did in 2010 (thanks, in part, to the disruptions caused by civil war in Libya). That “oil tax” was essentially enough to wipe out the entire stimulative effects of Barack Obama’s middle-class tax cut. A similar oil spike this year would wipe out a hefty chunk of the effects of extending the 200 billion payroll black studio headphone tax cut bill that Congress is fighting over.Of course, there are always caveats, buts and uncertainties. As Jared Bernstein observes, China’s frenetic growth seems to be slowing of late, which could ease some of the pressure on oil prices. Meanwhile, Saudi Arabia claims that it has enough spare capacity to make up any shortages due to disruptions in Iran, but analysts tend to be skeptical of how much extra oil the Saudis can actually pump out. What’s more, as Bernstein observes, Americans appear to have significantly cut back on driving in the post-financial crisis era, a trend that could help mitigate the shock to the U.S. economy somewhat.

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