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Higher oil prices threaten global economy

Fri., March 11, 2011

WASHINGTON – Higher oil prices are slowing global economic growth, and the impact is likely to spread in coming months.

Oil prices helped raise the U.S. trade deficit to a seven-month high in January, when crude prices were $87.50 a barrel. Oil is now trading at more than $100 a barrel, suggesting the gap will widen in coming months. Even fast-growing China isn’t immune – higher oil prices contributed to a rare trade deficit there in February.

“It’s a bad start, because we all know the oil shock is still coming,” said Paul Ashworth, an economist at Capital Economics.

Pricier oil dampens consumer spending and that cuts into economic growth. Surging oil prices can also stir up inflation fears, triggering higher interest rates that cut into household and business spending.

In January, America’s foreign oil bill rose 9.5 percent, or $3.04 billion, to $34.9 billion. That’s the highest monthly total since October 2008.

Since then, political turmoil in Libya, Egypt and Tunisia have sent oil prices surging. At the same time, accelerating economic growth in Asia and Latin America has also boosted demand.

The impact is visible in bold numbers each morning on gas station marquees across the United States. Pump prices have risen 13 percent in the past month to a national average of $3.53 a gallon, according to AAA, Wright Express and Oil Price Information Service.

Airlines have also been rapidly raising their fares to offset higher fuel costs. American Airlines said Thursday it is increasing its base fares by $10, the seventh price hike this year by U.S. airlines.

Jay Bryson, global economist at Wells Fargo Securities, said he has cut his U.S. growth estimate for the January-March period to 2.9 percent, down from about 3.3 percent last month. Much of that reduction is due to the impact of higher oil and gas prices.

The $46.3 billion trade deficit in January also will subtract from economic growth. Higher prices for oil helped drive imports up at the fastest rate in 18 years, as did rising demand for foreign cars, auto parts and machinery. Imports rose at nearly twice the pace of exports, to $214.1 billion, the Commerce Department said. Exports rose to an all-time high of $167.7 billion.

That isn’t all bad news. A wider deficit is partly a sign of greater spending by businesses and consumers. But it also means more of that spending is going overseas, reducing U.S. economic growth.

Imports of foreign-made autos and auto parts increased 14 percent, or $2.67 billion, as auto production rose in the U.S. and Canada. Demand for big-ticket capital goods such as industrial machinery and computers increased 5.2 percent. Imports of consumer goods, such as clothing, shoes, electronic appliance and toys and games, were up 2.2 percent.


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