Commentary; Posted: 11/2/04

Doom and gloom follows crude oil prices

Dave Purdy
Guest Columnist

The doom and gloom crowd has been focused on oil prices lately and, to some extent, rightly so. Crude oil prices have moved up to above $56 a barrel, which represents an all-time record high. And it is true that we import a lot with crude oil imports currently at nearly 10 million barrels a day.

Doing the math, that is about $560 million per day or $186 billion per year. And those high payments are not going to your family, friends and neighborsÖStill, it is important to put all this in context. After all, the U.S. economy is huge ñ GDP is almost $12 trillion, so total imports of petroleum and products are about 1.5 percent of GDP, not a big fraction.

And U.S. household spending on all types of energy is about 4.5 percent of total consumer spending. A doubling of energy prices subtracts about 1.25 percent from real after-tax household income, not a good thing, but not the end of the world either.

The previous peak in oil prices was way back in April of 1980 when the price hit $39.50, a burden that certainly contributed to the recession back then. However, bear in mind that there has been a lot of inflation over the last 24 years ñ the CPI has increased 134 percent.

So $39.50 oil back then would be the same as a $92 oil price now. In other words, the real oil price is still a lot lower than in 1980. In addition, households, businesses and government have learned to economize on energy. Cars get more miles per gallon and houses are better insulated. Energy efficiency has almost doubled, reducing the impact of energy prices on the economy.

So I would not characterize the current situation as an energy crisis. It does drain U.S. purchasing power and hurts economic growth around the globe. These high prices have likely knocked about one percent off U.S. GDP growth ñ reducing my forecast from 4-5% growth next year to 3-4 percent.

And that is not small change ñ it is a $120 billion deadweight loss and cuts my guess of next yearís employment gain from 3 to 2 million. It will, in my opinion, slow the rise in corporate profits and some industries, notably airlines, have already been hit hard by higher fuel prices.

None of this is good news. And it really pains me to see this money flow to foreign oil producers with oil production costs way below current prices who run a cartel that limits production to keep prices high.

That said, $51 oil is not, in my opinion, a showstopper. I do not think it will trigger a slide towards recession. I expect continued economic growth, higher employment and a continued rise in company earnings.

However, we could be doing more to formulate energy policies to keep prices more in line with costs, increase conservation and slow the flow of hard-earned U.S. dollars abroad. I would hate to see us do nothing and watch prices move to even higher levels.

Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC and an investment advisor.

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