- The Washington Times - Tuesday, March 7, 2000

The U.S. economy weathered a doubling of oil prices last year without missing a beat, but the latest round of increases poses a risk of economic damage, economists say.
Sky-high gas prices could shake the confidence that has been fueling consumer spending and economic growth. And they raise a potent threat of inflation that almost certainly will drive up interest rates, economists say.
While few economists expect the latest bout of oil-price increases to result in economic devastation or a recession, they say anyone who lived through the oil-induced recessions of the 1970s, 1980 and 1990-91 can't help but feel a bit worried that America's oil dependency will sink the economy again.
"The last three major recessions were caused by oil prices. Four in a row is not infeasible, even though oil is less important in the economy than it was 25 years ago," said David Wyss, chief economist with Standard & Poor's DRI in Boston.
Today's gasoline price increases expected to climb to as high as $2 per gallon by summer are eerily similar to the ones that occurred in 1990 as the Federal Reserve drove up interest rates to slow the economy, hitting it with a "double whammy" that plunged it into recession, Mr. Wyss said.
But he was quick to add that he does not expect a recession this time, because the economy is far stronger and more productive than it was in 1990, and inflation and interest rates are much lower.
Americans may be suffering from sticker shock from the latest sharp rise in gas prices, coming on top of last year's 138 percent jump in crude oil prices. But they are not worried about disruptions in the supply of oil like they were in 1990-91 when the United States was waging war in the Persian Gulf, Mr. Wyss said.
Fears about shortages during the war caused a plunge in consumer confidence that led to that recession. Just as in past years, how consumers react to the price increases will be critical this year, Mr. Wyss said.
"If we get a mild pullback by consumers to offset the extra money they are spending on gas, we'd get a mild slowdown in the economy which the Fed would consider appropriate. That would be no big deal," he said.
"The danger is that people panic and stop buying sports utility vehicles, which shuts down GM and the other automakers and it spirals from there into a recession," he said. Sports utility vehicles, which get as little as 10 to 15 miles to the gallon, are overtaking cars as the American vehicle of choice.
While gas prices have hurt consumer confidence falling 2 percent last month from January, according to the private economic group, the Conference Board it remains at near-record levels that do not suggest consumers are ready to throw in the towel, Mr. Wyss said.
"I don't think there will be a disaster," he said, but people are going to get "real annoyed" and complain when they see gas prices this summer.
Many economists say last year's experience proved the American economy is less vulnerable to oil price rises than it was in 1990 because American manufacturers, power plants, airlines and other businesses greatly increased their energy efficiency in their drive to cut costs during the 1990s.
The average energy efficiency of cars, trucks and airplanes has increased, though the low cost of gas during the 1990s induced Americans to splurge on gas guzzlers like sports utility vehicles.
America's oil-buying binge reached a peak in late 1998, when consumers saw gas prices drop to $1 a gallon and crude oil hit a low of $11 a barrel as a result of the economic collapse of Asia, Russia and Latin America.
Americans apparently viewed that stunning price drop mostly as a windfall, Mr. Wyss said, and were not too shocked or upset when oil prices last year returned to the levels they had seen before the Asian economic crisis.
But now, prices at the pump are hitting record levels and causing a lot of grumbling. The latest uptick also poses a risk of igniting a larger inflation problem as airline, trucking and other companies start passing on their higher costs to customers, economists said.
"So far, the price effect of higher oil prices has been muted since oil is less important in the economy than it used to be," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis.
But he noted that oil goes into "everything from plastic toys to garbage-can liners," which raises the possibility that "higher prices could lead to a wage-price spiral" as it did in the 1970s and 1980s.
Without the production increases expected to be announced at a March 27 meeting of the Organization of Petroleum Exporting Countries, Mr. Sohn said tightening supplies of oil and growing demand in the United States and the rest of the world could drive oil prices to $40 a barrel from about $32 currently.
That price jump would be like a tax increase that takes $90 billion out of consumers' pocketbooks the equivalent of a 10 percent rise in income taxes and would cut economic growth by 1 percentage point, he said.
The negative effects would spin off from there, he said. "Financial markets would be buffeted by higher oil prices. Heightened inflation expectations would further raise long-term interest rates, hurting sectors from housing to capital spending."
Some analysts warn that unexpectedly high oil prices could hurt the stock market particularly. The market has been driven higher in recent years by predictions that corporate profits would remain high. But those predictions are based in part on the belief that oil prices would stay near the historically low levels of the 1990s.
Stiff competition has made it hard for companies to pass the cost of rising oil prices on to customers, forcing them to absorb any price increases and that hurts profits, economists say.
The stocks of transportation companies and other businesses heavily dependent on oil have been hit as prices unexpectedly spiked to more than $30 a barrel, sending the Dow Jones Transportation Index plunging by more than 20 percent this year.
Analysts note the markets were surprised last year by unexpected cohesion within OPEC after years of disunity that enabled the diverse group of oil-exporting countries to stick with the production cutbacks that drove up the price of oil.
The market could be surprised just as much this year at OPEC's ability to stick together and manipulate the price and supply of oil further to its advantage, one international analyst said.
But Greg A. Smith, stock strategist at Prudential Securities in New York, said he doesn't expect the turmoil in the oil market to have an impact on the stock market.
Stocks actually could rally, he said, if oil prices fall back into the mid-$20s as a result of OPEC's production increases, as some analysts expect.
"Oil prices aren't as important as they used to be" because "the amount of inflation caused by energy is much less than it used to be," and OPEC has learned to be more responsive to the demands of oil-consuming nations, he said.

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