India and U.S. Small Business Worry About Oil Prices

Economists continue to look for the tipping point at which oil prices begin to undermine gross domestic product. They got two more hints today. Each was from an entirely difference source, which makes them all the more troubling.

Indian oil and gas minister Jaipal Reddy said a rise in energy prices may undermine the growth of the nation’s economy, according to a quote in the Wall Street Journal. He said the good news is that energy demand shows a sign of economic growth. However, energy prices could halt that growth quickly. India matters to the world economy. It is the ninth-largest nation by GDP and one of the fastest growing. That makes it a critical market for exports from developed nations.

In the United States, the National Federation of Independent Businesses reported that business optimism dropped in March compared to the previous month. The decline was by two points to 92.5. The association of small businesses offered several reasons for the drop. One was erosion of consumer confidence. Another was a slowdown of EU economic activity. Near the top of the list was inflation, caused mostly by a sharp increase in energy costs.

Small businesses remain among the most important sources for new jobs. Once the views of these firms have of their prospects turn negative, the national employment creation machine, which operated well for almost a year — until March — will slow.

There has been an ongoing hope that economic growth here and abroad could dodge the rise in oil prices. Perhaps the Iran crisis would begin to end. The U.S. and other developed nations might release strategic oil reserves. A slowdown in the economy in the European Union, and even China, would lessen demand. (Actually, China’s oil imports were 5.57 billion barrels a day in March, the third-highest level ever, according to the General Administration of Customs.) Americans would begin a real drive to conserve energy. None of these things has happened. Oil has not continued to spike up the way it did for two months, but WTI crude is still above $100. Gasoline price increases have begun to slow, but the price of a gallon of regular is still near $4. So, crude and gasoline costs remain breathtakingly high. People and businesses that run on petroleum products have begun to be beaten down.

India’s energy issues can be tied to improved economic activity. Since the economic confidence index issued by the National Federation of Independent Businesses was near recent highs in February, its prospects picked up as well. In each case, demand for raw materials and commodities jumped recently. Now, the demand that has created high oil prices has begun to bite profits in one case and GDP in another.

The effects of high energy prices have started to show up in various areas essential to national and international growth.

Douglas A. McIntyre