The Oil Price Dilemma Returns

Driven mostly by the Federal Reserve's QE3 announcement, WTI crude prices leapt to within a few pennies of $100, and Brent is above $117. WTI crude prices already had moved up sharply from the June low of just above $80. Economists can once again begin to make cases that high oil prices will dampen whatever GDP expansion there is in the United States and can also overwhelm any positive effects of the Fed's actions. The bearish forecasts will be fair.

Although oil prices spread throughout the economy because of the use in refined crude for everything from petrochemicals to heating oil, the number that catches the most attention is always gasoline prices - probably because nearly everyone in America older than 16 years old drives.

The AAA Fuel Gauge puts the price of a gallon of regular gasoline nationwide at $3.871, up from $3.709 a month ago. In heavily populated states, which include California, New York, Michigan and Illinois, the price of a gallon of regular on average is already over $4. The national average could certainly move back toward the $4 before the holiday season, as oil prices rise, even though oil and gas prices are not directed linked.

Some experts believe that gas prices had a hand in the slowing of a recovering economy last spring. That can never be proven entirely, but based on the lack of discretionary income among the poor and middle class, it is a plausible theory.

The economy already has moved toward another major set of tests, and high gas prices would add to the severity of those. The fiscal cliff and a lack of momentum during the holiday shopping season could each cripple gross domestic product at the end of this year and well into next. Gas prices have both a real effect that could magnify these problems, and the psychological effect based of the price pushing through a level - the power of which at precisely $4 is only imaginary.

The imaginations of many Americans may be the most substantial barrier to a full-blown recovery.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Economy, Oil & Gas Tagged: featured