Oil Prices and the U.S. Economy

According to the American Petroleum Institute, every one-cent increase in the price of gasoline in the United States costs consumers an additional $1.4 billion. Higher energy prices have reduced G.D.P, i.e., gross domestic product, growth by an estimated one-half-to-one percent this year alone.

Lyle Gramley, a former governor of the Federal Reserve Board, says that's money that will not be spent on other goods such as televisions, toasters or refrigerators. "Until very recently, we've seen virtually no reaction of the economy and particularly no reaction to consumer spending at all to the rise in energy prices," say Mr. Gramley. "The March data on consumer spending, however, suggests that it's now beginning. And I think that if oil prices stay up in the $50 a barrel range, it's going to take a significant toll on consumer spending. Are we going to have a recession? Most certainly not. This is an economy that has strong fundamentals. It will keep growing, but it will grow more slowly than it has been recently."

Record high diesel fuel prices are having a significant impact on the trucking industry. In some parts of the country, diesel now sells for more than gasoline. Bob Costello, the chief economist for the American Trucking Association, says the average cost of a gallon of diesel [about 3.78 liters] in the United States is $2.25. He says that is putting pressure on companies to recover the increased cost of shipping goods to market. Mr. Costello notes, "We've never seen anything remotely this high. In 2004, when diesel fuel averaged just $1.81 a gallon, the trucking industry spent more than $ 80 billion annually [on fuel]."

Economist Bob Costello says there is a snowball effect to higher diesel prices that eventually will impact nearly every sector of the economy. He adds, "When the vast majority of goods consumed in the U.S. come to us via truck, and the price of hauling that freight is going up, whether it's through higher prices at the stores, trucking companies and/or other businesses buying trucking services can't employ as many people and can't expand as much because they are paying more for fuel. That has an impact on all of us. When we pay higher fuel prices, you and I as consumers are going to see at least a portion of it."

Economist Lyle Gramley, with the Stanford Washington Research Group, says when the rising price of fuel translates into higher costs for goods and services, that puts upward pressure on inflation, which will probably lead to higher interest rates.

"The risks to inflation are on the high side," says Mr. Gramley. "I think the Federal Reserve knows that, judging by the [information] release they put out following the March 22nd Federal Open Market Committee Meeting [i.e., the policy making committee of the Central Bank]. And I think we will see interest rates continue to move up gradually -- another 25 basis points, one-quarter-of-one percent at the May meeting and still another one-quarter-of-one percent in June. And by the end of the year, we will see the Federal Funds Rate, that is the key rate on overnight loans that the Fed controls, in the range of 4-to-4-and-a-quarter percent."

When the Federal Funds rate moves higher, other interest rates, home mortgage rates and credit card interest rates, generally follow. Because the United States is the largest trading partner for many countries, when the U.S. economy slows, most economists say slowdowns elsewhere can be expected.

Richard Savage, the global head of commodities research for the Bank of America in London, doesn't foresee a worldwide recession because of high fuel prices. But he does forecast a worldwide slowdown in growth. According to Mr. Savage, "High oil prices do have an impact on economic growth. Although we have seen the actual energy component of G.D.P being lower today than it has been historically in terms of our energy dependence, this level of prices, we believe, will start to produce some kind of slowdown effect."

Earlier this week at the his ranch in Texas, President Bush and Saudi Crown Prince Abdullah discussed oil supplies and high prices. After the meeting, the foreign affairs advisor to the Crown Prince said his country does have the capacity to produce more oil and will. But it will take time and volatile oil prices.