The “recovery” gained another enemy this week when the price of oil hit $90 a barrel on Tuesday (it was trading around $88 this morning). Higher oil prices translate into bigger costs for American households and the many petroleum-based products they use. This benchmark has long been seen by many economists as a point when oil prices start to harm the U.S. economy. They also are one of the biggest wild cards in the Federal Reserve’s bet that deflation — or at least disinflation — are the big dangers, rather than inflation.
You can always find a school of thought that oil prices are a creature of speculation. But the price rise has also been driven by higher demand in an Asia and parts of Latin America that are recovering while America and Europe lag. Oil & Gas Journal reports that third-quarter demand hit an all-time high. It’s also important to recall the new International Energy Agency report that concludes world conventional production peaked in 2006. That means higher prices ahead. Oilman T. Boone Pickens Jr., who correctly foresaw the $80 ceiling being shattered this year, predicts $100 a barrel oil in 2011.
The Great Recession caused oil prices to fall, but, tellingly, not to crash. It gave us a pause in which to do things such as retrofit suburbia with transit, build high-speed rail and other programs to prepare for a high-energy future. These would have been effective jobs programs, too. Instead, nada (at least in this country). American policy-makers are living in 1970 — not a good place to be, if you remember the real 1970s.
Could oil prices fall again? Absolutely. Extreme volatility in prices has long been foreseen by peak oil thinkers. But the long-range outlook is up, and that further clouds the prospects for the United States.
Today’s Econ Haiku:
Talk about strange bed fellows
Both hate strong unions