Oil Approaches $100 a Barrel

After months in retreat, WTI crude has moved back to near $100 a barrel. Today it trades at $96.27, and over the past several weeks, the trend has been up. Economists can renew the debate about how much oil prices undermine global gross domestic product. The answer is clear. Increased oil prices hurt margins and consumer discretionary spending, although no one can say for certain by how much.

Crude traded for just below $80 a barrel in late June, so the advance stands at 22% since then. Given that this price is passed along to every industry that uses petrochemicals, oil, diesel and gas, the shock waves already have begun, even if it is too early for the effects to show up in economic measurement numbers.

The economies the United State, Europe, Japan and the United Kingdom began to disintegrate several months ago, and most important events in the next few months, whether they are related to the “fiscal cliff” in America or the effects of austerity in Europe, will slow any GDP progress that is left among developed nations. The direct harm of oil prices is somewhat fogged by its relationship to the value of the dollar, but as oil price inflation trickles down to people like middle-class or lower-class drivers or small businesses, the dollar does not mean much.

Among the most immediate concerns about oil prices is that the cold weather season in the United States and Europe is only three months away. The relationship between the two is not hard to draw. Oilprice.com recently reported:

While heating oil and crude oil do follow different seasonal trends their prices are still directly related. Since heating oil is derived from crude oil, increases in crude oil prices will in-turn increase heating oil prices. As demand for crude oil grows, the price of both gasoline and heating oil will increase.

Plans for stimulus programs among some large nations like China and Brazil will cause oil prices to rise for the time being, whether or not these stimulus programs work for any period. Whether worry about battles over Iran’s weapons programs actually will block crude supplies is anyone’s guess. What is not a guess is that skittishness about supply and possible increases in demand will keep crude prices up. Whatever the effects of that on the economy are exactly, they will not be good.

Douglas A. McIntyre