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The word on The Street is that a strong economic rebound and cash-rich consumers in advanced economies will be able to absorb any ongoing rise in oil prices, according to several economists who spoke to the Wall Street Journal.
Benchmark Brent crude prices have more than doubled over the past 12 months and as we have been reporting recently crossed above $75 a barrel for the first time since September 2019.
However, the price would have to reach at least $85 a barrel for oil’s share of global GDP to return to its historical norm of 3.2 percent, according to a Morgan Stanley analysis cited by the WSJ.
The last time oil surpassed that norm was in 2005, when strong global growth absorbed the higher price, Morgan Stanley analysts wrote in a research note recently.
“Given the fact that consumers are in very good financial shape, I don’t think the higher prices are going to be a significant hit to their bottom lines,” Gus Faucher, chief economist at PNC Financial Services Group, said to the WSJ.
The recent price hike is driven by growing demand, not by short supplies. Typically, demand-driven price increases indicate a resilient economy ready to accept higher prices without compromising economic performance, according to the Federal Reserve Bank of New York.
Also, the U.S. and many other advanced economies have shifted in recent decades to a greater reliance on services.
As a result, it takes only half as much oil to add $1 to the U.S. GDP as it did in 1985, according to the U.S. Energy Information Administration.
In addition, 20 percent of Europe’s energy comes from renewable sources, double the amount in 2004, making its economy less susceptible to gyrations in the price of oil.
In contrast, emerging markets might be more squeezed by oil’s rising prices; residents of developing nations typically pay a higher proportion of their incomes for food and energy than those in the U.S..
TREND FORECAST: We disagree with The Streets assessment. For the masses, the plantation workers of Slavelandia, each time they pick up a gas nozzle to fill their cars they know the exact price of what they are pumping… and how many pennies it rose since the last time they filled up their auto.
The recognition of rising gas prices is a reality which in turn has consumers more aware of what they are spending. Thus, higher prices of fuel are viewed by the public as an indication of inflation in general, a reminder that their dollars are not going as far as they once did.
TRENDPOST: Trends Journal addressed how inflation affects global economic recovery in the 15 June 2021 article, “INFLATION HOBBLES GLOBAL RECOVERY.”
The American Automobile Association predicts that gas prices, right now almost a dollar per gallon higher than the same time last year, will increase by another 20 to 30 cents per gallon by the end of August.
We also disagree with the claims that energy now plays a smaller role in the U.S. economy because U.S. manufacturing has been reduced, and that the rise of renewable energy means the U.S. is less reliant on oil. Even if that were true, the impact is already being felt by the general public who are least able to absorb the higher costs of gassing up their vehicles.