The Ukraine Crisis: Oil Surge Threatens Growth

"For a brief period in the 2010s, high oil prices meant good news for the U.S. economy. Now, they are once again a threat to growth.

With prices topping $100 a barrel for the first time in nearly eight years, the commodity is set to squeeze American households, push up inflation, dent the economic recovery and create a new headache for the Federal Reserve as it moves to raise interest rates.

Brent crude, the international oil benchmark, traded above $100 a barrel Thursday morning. Futures for West Texas Intermediate, the main grade of U.S. crude, hovered around $93 a barrel late Thursday afternoon.

The rise is being driven by strengthening global demand as economies reopen and recover from the pandemic; low inventories as oil producers struggle to boost output for a range of reasons; and fears of a disruption tied to Russia's attack on Ukraine.

Few economists say the U.S. is in danger of recession because of high oil prices. But many expect U.S. growth, which appears to have lost momentum because of the Omicron variant of Covid-19, to slow further if prices continue to increase. "The economic costs increase the higher oil prices rise," said Mark Zandi, chief economist at Moody's Analytics.

The U.S. had since the 1970s usually been a net oil importer, which meant a higher oil price acted as a tax that funneled American consumers' dollars to foreign exporters. That began to change about a decade ago when domestic producers used new drilling techniques to release a flood of oil from shale formations. The techniques enabled firms to boost output by millions of barrels a day. By 2018, the U.S. had become the world's biggest oil producer.

During the shale boom, companies drilled aggressively, creating jobs and kick-starting economic activity throughout those regions. Higher prices enriched investors and encouraged additional drilling and investment, offsetting the negative effects from higher gasoline prices on consumers.

Today is different. U.S. companies and their investors are reluctant to drill too much, too quickly after an oil-market crash starting in 2014 that caused prices to fall below the level needed for many U.S. wells to turn a profit.

If oil stays at $100 this year, U.S. households on average would spend $750 more on energy than they did last year, said Gregory Daco, chief economist at consulting firm EY-Parthenon. He estimates that the higher prices would reduce GDP growth by about 0.3 percentage point in 2022 -- "not insignificant in the context of an economy already being weighed down by a higher inflation environment," Mr. Daco said." [1]

1. The Ukraine Crisis: Oil Surge Threatens Growth
Mitchell, Josh. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 25 Feb 2022: A.6.