The surge in prices could not have come at a worse time as it is likely to complicate matters further by fueling inflation in an already weak economy.
Amid recession fears, prices have continued to climb, pushing inflation to an annual rate of nearly 7%.
The Fed, meanwhile, is fighting to revive the U.S. economy by cutting interest rates. If they succeed in maintaining low interest rates when prices are rising, however, the Fed’s moves may lead to even higher inflation. On the other hand, if the Fed fails to keep cutting rates, the economy could plunge into recession.
In some sense, then, the Fed is caught between a rock and a hard place. As higher prices tend to fuel inflation and curb growth at the same time, the Fed cannot afford to overlook inflation while it struggles to avert recession.
Decline in Consumer Confidence
Higher energy prices will not only eat into consumers’ hard-earned money, they will also dilute the impact of the recently approved government stimulus bill.
A price difference of 10 cents a gallon might theoretically not make much of a difference in Americans’ lives; nevertheless, surveys are indicating a sharp decline in consumer confidence.
The Reasons for the Price Hike
Experts have offered various opinions on the causes of the rise in energy prices. Some believe hedge funds and the frenzied buying of energy futures by wealthy individuals led to the hike. However, some attribute it to rebel attacks on oil facilities in Nigeria and OPEC’s suggestion that it may cut production.
OPEC countries, defending themselves, blame average crude oil supplies and speculative tendencies for the frenzy.
And all the while, many industry experts say the real culprits are simply strong demand and a limited supply.
Global Scenario
In recent years, a strong U.S. economy kept oil prices aloft, but recently they have hit all-time highs even as the U.S. economy has weakened. This is a clear indication that the United States is no longer oil's main driver.
The prevailing sentiment is that the demand in emerging economies like India and China can keep oil prices high regardless of what happens to the U.S. economy. While the U.S. economy is likely to grow by 1.5% in 2008, countries like India and China are growing at an average rate of over 8% a year.
Of the total expected daily global consumption of 1.4 million barrels of oil in 2008, developing nations are expected to account for more than 1 million barrels.
Looking Forward
Oil at $100 per barrel may not necessarily sink the U.S. economy, but expensive fuel is certainly bad news for an already battered economy.
And more importantly, triple-digit oil prices are more likely to be a regular feature of the global economy in the coming years.
