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Economy Under the Heel of Oil | Oil Watchdog

Press Release

Economy Under the Heel of Oil


Wed, Feb 20, 2008 at 1:59 pm

    Economy Under the Heel of Oil

    2-20-08 by dugan



    Remember last year’s stories about how resilient the U.S. economy seemed in the face of rising energy prices? What a different story today, with energy prices driving a scary rate of inflation. The financial analysts who confidently predicted a few months ago that energy costs would drop in response to the economic slowdown are changing their tune, most recently Lehman Brothers. Its $86-dollar-a-barrel prediction is being revised sharply upward.

    Lehman’s chief energy economist, Edward Morse, told Bloomberg television today that oil prices, which rose to a record
    $100.10 a barrel on the New York Mercantile Exchange yesterday,
    are being driven by financial markets rather than supply-demand
    fundamentals. That’s not news, but the fallout is. Here’s a sampling:

    The largest state economy, California, today saw its 2008 deficit revised upward, from $14.5 billion to $16 billion, with blame split between real estate losses and rising energy prices. As one observer pointed out to me, diesel is nearly $3.70 a gallon. School buses run on diesel, and can’t reduce their driving. How many teachers, in California and elsewhere, will be laid off because of fuel prices?

    A Neilsen survey last month found that consumers were cutting back on driving, and on spending across the board, because of fuel and energy prices. The survey was published even as gasoline prices were at a "low" point, under $2.90 a gallon. Today regular gasoline is over $3.05 a gallon on average nationally, only 17 cents from last spring’s brief all-time record. It’s also 79 cents a gallon more expensive than at this time last year, according to AAA. And refiners are cutting back on production, aiming to boost their part of the profit by forcing gasoline prices even higher.

    On the East Coast, refiners were until recently exporting "excess" gasoline to Africa, for the same reason. They succeeded, as the linked Reuters story says, though it’s all couched in trader-speak.

    Inflation is also working against the Federal Reserve’s interest-rate-cutting strategy–which doesn’t even consider energy and food prices. Ordinary folks are being hit much harder by rising prices than the government’s "core rate," currently 2.5% annually, would suggest.

    Some economists are telling the Wall Street Journal not to be alarmed by the energy price spike, that inflation will certainly calm down later this year. But these are the same economists who were sure energy prices would fall by early 2008. (See Lehman Bros. above)

    It’s like that old saying, "Who are you going to believe, me or your lying eyes?" Anyone who can see the numbers on the gas pump knows who’s lying.








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