Brent Crude Oil Nears $110 on Mideast Turmoil
Brent crude traded at $107.68 today as West Texas crude prices moved to $94.24. The Brent benchmark could move higher than $110 if the turmoil in the Middle East continues. Oil prices don't immediately transfer to gasoline pump prices, but they surely have an impact as crude moves through refineries into finished products. AAA data showed gas prices hit an average of $3.171 last week across the U.S. The price is between $3.255 and $3.735 in eight states, including California, Illinois, and New York. These states hold a quarter of the U.S. population. At what price levels do heating oil, gasoline and petrochemicals affect the U.S. economy and undermine GDP growth?
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The risk is that growth could slip back below the 3% level that many economists have forecast for the year. Also, rising energy prices don't hit all sectors of the economy at once. Poorer and middle-class families are probably already feeling the pinch. Consumer spending was hit when gas rose to $4 a gallon in 2008, and some energy experts expect to see that price level once more. Businesses that use petrochemicals and oil face similar problems. At companies where margins are already thin, high oil prices will cut profits and may even cause losses. That could trigger layoffs and eventually undermine any improvement in the jobless rate.
Two solutions to higher oil prices have been suggested. The first is lowering the federal tax on gas. It has been 18.4 cents a gallon since 1993. A lower tax rate, however, would obviously hurt attempts to trim the federal deficit and reduce pressure to keep moving the U.S. economy away from a dependence on imported oil. Another solution would be to release some of the Strategic Petroleum Reserve, which currently amounts to 727 million barrels. Although in this case, the government would risk having to replace the oil released at higher prices.
