Oil prices have jumped by about one-third since the summer on signs of stronger economic growth around the world and fear of instability in the Middle East.
So far, however, the run-up isn’t setting off alarm bells. Prices remain far below their 2014 peaks. And U.S. producers are pumping at a record rate, leading some experts to bet that the higher prices won’t last long.
At midday Monday, Brent crude, the benchmark international price, was down 27 cents to $63.25, while the standard for U.S. oil was up 10 cents to $56.84.
Those are sharp increases since mid-June – about 35 percent for U.S. crude, nearly 40 percent for Brent.
“That means slightly higher inflation, but we’re not talking about unmanageable prices,” said Diane Swonk, the chief economist of DS Economics.
Swonk said discretionary spending by consumers seems to be holding up despite the increase at the pump. In her mind, we are in better shape to manage higher energy prices for many reasons, including a stronger economy and job growth.
Still, consumers will feel the effect. In the U.S., the average price for a gallon of regular gasoline has risen 30 cents since early July.
Moody’s Analytics estimates that if the elevated oil prices last a year, they would cost U.S. consumers $30 billion and shave a couple tenths of a percentage point off the nation’s economic output.
Chris Lafakis, an energy analyst at Moody’s, said airlines and delivery companies such as FedEx and UPS will see profits reduced partly because they can’t raise prices quickly enough when fuel costs rise. Oil-producing countries and oil companies – including U.S. outfits – are the obvious winners. Third-quarter profit at Exxon and Chevron was about 50 percent higher than a year ago.
Jet fuel, closely tied to the price of oil, accounts for about one-third of an airline’s operating costs – rivaling labor as the biggest expense. Helane Becker, an analyst for Cowen and Co., said that with oil in the mid-$60s, she expects airlines to raise ticket prices.
Andrew Kenningham, the chief global economist at Capital Economics in London, said however that the impact of higher oil prices on companies and households will be limited, because for the year as a whole, average oil prices are up only slightly over 2016.
Crude prices began rising this summer as positive signs rolled in for the world’s biggest energy-hungry economies: the U.S., Europe and China. Prices were also influenced as expectations grew that OPEC would continue to limit production next year, and on rising tension between Saudi Arabia and Iran.
However, many market-watchers expect Mideast tensions to boost oil prices only temporarily – unless a direct conflict breaks out between Saudi Arabia and Iran.
Meanwhile, higher prices are encouraging U.S. companies to pump more. The U.S. Energy Information Administration reported that domestic production hit a record 9.62 million barrels of oil a day in the week that ended Nov. 3.