Thursday, May 28, 2009

Oil soars past $65. And: Rising oil may test U.S. economy's green shoots

Two from Reuters:
Oil surged past $65 a barrel on Thursday to a fresh six-month high after OPEC decided to keep output unchanged and government data showed a steep drop in U.S. crude inventories.

U.S. crude oil for July delivery settled up $1.63 to $65.08 a barrel, the highest settlement since November 5, after hitting an intraday high of $65.44. London Brent crude rose $1.89 to settle at $64.39 a barrel....MORE


Swiftly rising oil prices threaten to sap the buying power of U.S. consumers who are essential to ending the longest recession since the Great Depression.

Oil has been on a tear in the last five weeks, rising 48 percent since April 21 to hit a 2009 intraday peak above $65 per barrel on Thursday. Part of that reflects hopes that the global economy is inching out of a deep slump, but it may also have something to do with investors seeking an inflation shield as the U.S. dollar weakens and government spending grows.

While oil is nowhere near last summer's record high of $147 per barrel, the run-up in prices comes at a fragile time for the U.S. economy and so could prove particularly harmful. Unemployment is at its highest level since 1983 and wages are growing at the slowest rate on record, leaving consumers with a much thinner cushion to absorb rising costs.

"We're counting on consumers to be the spending that eventually brings us back on track," said James Hamilton, an economics professor at the University of California, San Diego, who has studied the role that last year's oil price spike played in triggering the current recession.

Hamilton said oil is not yet expensive enough to cause the same degree of pain it did last year, when gasoline prices exceeded $4 per gallon and squashed consumer spending, but if it continues to increase it could "postpone some of the recovery we'd been hoping for."

The U.S. Federal Reserve, which is currently more concerned about deflation than inflation, would find itself in a tough spot if oil prices sparked a bout of inflation. Its strongest inflation-fighting medicine is higher interest rates, but that would put an unwelcome drag on economic growth....MORE