Energy Economy

Oil Moves Toward $80 and Challenges Economic Expansion

Douglas A. McIntyre

Crude oil prices have nearly reached $70 a barrel this year, and tensions in the Middle East coupled with a resurgence of U.S. and Canadian shale production could move that price to $80 soon. Many consumers may have trouble with the rise in gasoline and heating oil costs that come with such a high price. So will companies that rely on oil, gas and oil by-products.

Oil prices have not been near their present level in three years. They were last at $80 in March 2014. The average price of a gallon of regular gasoline was $3.40 then, which is almost 25% higher than current gas prices.

Many economists believe that the next downturn will be due to rising interest rates, a trade war (particularly with China) or a single event like a military incident with North Korea. This rise in oil prices could be just as damaging, but more insidious. Gas prices, for example, may only rise by a few pennies a week. By late summer, they could pop over $3, particularly because of the supply demands of summer driving that culminate over the Labor Day weekend.

High oil and gas prices could hurt the economy when it relies most on consumers in the fourth quarter of the year, and particularly the final two months. Retail sales, in particular, would be threatened by a falloff in consumer discretionary income. Wages have not risen rapidly in the past few years, and for many workers they have not risen at all. That makes them particularly vulnerable to a rise in gas prices.

One of the most heated debates about oil prices recently is that the Organization of Petroleum Exporting Countries (OPEC) would like to see oil above $80 per barrel and is prepared to act to push prices that high. Investment bank Goldman Sachs has forecast that crude could reach that level sometime this year.

The idea that oil might reach $80 was almost out of the question a few months ago. That has changed fairly fast.