Light crude oil prices have been climbing in the last few days, closing the week at $88.94 per barrel on the NYMEX. In spite of the bad U.S. jobs report, the declining value of the dollar and concerns that global oil supplies may be tightening helped drive prices up, as well as reports of strong growth in China.
But could high oil prices further weaken the economy? In mid-2008, when oil prices peaked above $140 per barrel, those prices certainly seemed to help slow the economy, but it's hard to say at exactly what point prices began to have that chilling effect. Crude breached $90 a barrel in early spring on its way up to its record high, then fell sharply below $90 in the fall when it became clear that the economy was softening.
Fallout from High Crude Prices
The 2008 crude increase resulted in high prices for gasoline, jet fuel and all petroleum-based chemicals. Airlines and other transportation companies saw their margins fall, and consumers cut back on driving -- but didn't stop driving because they still needed to go to work, take children to school, and make trips to stores and shopping centers. Household budgets were upended.
The farm economy also was hit hard because of its use of tractors and other farm vehicles. The only companies that made out like bandits were the large oil firms. Exxon-Mobil's (XOM) stock hit a record above $90 in the spring of 2008. Now, it rarely trades above $70.
The recovery of the American economy is still tentative. The recent jobs report shows unemployment is increasing instead of decreasing, and most data on U.S. factory activity shows it is tepid. Consumer confidence also remains spotty. And the housing market is still in deep trouble, which continues to rob Americans of the one critical equity pool that they could previously tap to cover expenses.
If oil continues to rise, at some point, the cascade effect that it has on people's budgets -- and on the large industries that rely on oil and petroleum-based products -- will begin to slow economic activity, putting another set of brakes on a fragile recovery.
Climbing Oil Prices Could Threaten Fragile Economic Recovery