Fooling themselves

Since when do higher oil prices have no impact on the economy?Recent news reports have given a relatively positive spin to the impact of fuel price increases on the economy. The Federal Reserve has been characterized as "calm on inflation despite oil hike," and the President has been quoted as saying, "high oil prices won't hurt the economy."Well, I come from a world where people have to pay for their

Since when do higher oil prices have no impact on the economy?

Recent news reports have given a relatively positive spin to the impact of fuel price increases on the economy. The Federal Reserve has been characterized as "calm on inflation despite oil hike," and the President has been quoted as saying, "high oil prices won't hurt the economy."

Well, I come from a world where people have to pay for their own gasoline and home heating oil. And in this world, it costs $30 to fill up my car. As for heating my home in Maine, where the average snowfall is 108 in., there's the all-too-likely possibility that there won't be enough oil for a fill-up at all. And according to the Farmers ' Almanac, I'm in for more snow than average this winter. You betcha, no impact on me.

Part of the problem is that U.S. refineries are selling home heating oil to the rest of the world at prices that would stun our citizens. We ship this oil to Europe because our refineries can earn more money selling it to consumers overseas than here. And that's not likely to change anytime soon. The result will be prices for fuel at levels not seen since the Gulf War.

Let's go back to the "higher oil prices won't impact the economy" point of view many politicians have been spouting. What kind of assumptions is this view based on?

Here's one: The economy is slowing, so there will be less demand for fuel. Wait a minute. The economy's rate of growth will slow, but it will continue to grow, not shrink. In fact, one of the sectors that is expected to grow - trucking and distribution services - will need more, not less, fuel.

The second assumption: Since petroleum expenditures account for 3% of the gross domestic product (GDP), down from 5% in the early 1970s, we're less dependent on energy than we were in the past. Wait a minute. Petroleum expenditures may represent only 3% of the GDP, but they are directly related to the transportation of the things I want to buy and how warm I'd like to keep my home this winter.

If the price of oil increases, people will either have to cut back on spending or take money out of their savings accounts to pay their bills. With recent savings patterns described as negative - people have already been taking money from their savings to maintain their spending levels - this could be a problem.

And it will only get worse if the price of oil goes up. When people's savings are depleted, they'll have to cut back on spending. That's what I call an economic impact.

Regardless of the amount of economic growth, we will need more fuel.

Then there's Iraq. Ever wonder why Iraq flexes its minimal military might just when its output of crude is critical for world supply? The latest show of aggression comes just before the peak demand for petroleum-based fuels of all types. The next step is to halt production of crude for two months and watch the rest of the world squirm. That would cause fuel prices to spike further, increasing political pressure to release the sanctions against Iraq. Should the withdrawal of crude oil take place, we're likely to see rationing, at least economically, as prices increase rapidly.

Closer to home, the people most affected by higher oil prices are those with the least amount of disposable income. Since they have no cushion to fall back on when the cost of living goes up, they have to cut back on other spending.

Regions heavily populated with these consumer groups will see virtually no economic growth in the coming months; slim-to-none will describe the profits in the retail and wholesale markets servicing these areas. Sounds like an economic impact to me.

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