Why Recent Gas Price Spikes Arent as Painful as in the Past

By Mark Jr.

Oct. 22, 2006

The overall economic situation is not as bad today as it has been in previous oil price spikes. Productivity has continued to grow and the economy has expanded since 2001, when the latest increases began to take hold.

One reason is that consumers have kept shopping. Unlike the oil embargo of the mid-1970s, energy price escalation during the past five years has come from an increase in demand rather than a supply shock.

Today, China’s ravenous appetite for oil to feed its manufacturing base and the need for Americans to fill the tanks of their sport utility vehicles are major factors in boosting prices. In the 1970s, sudden events, such as the Middle East oil embargo, were the culprit.

The journey toward oil at $70 per barrel proceeded in incremental steps rather than through a dramatic price increase that “captured the imagination of buyers,” says James Hamilton, professor of economics at University of California, San Diego. If buyers are spooked and pull back, it can eventually lead to layoffs.

That clearly isn’t the problem now. Unemployment actually decreased as prices were hitting $3.

Another factor limiting the damage to jobs is the performance of the Federal Reserve. Even when a disaster crops up—like Hurricane Katrina’s ravaging of oil rigs in the Gulf of Mexico—the impact is muted.

“The Federal Reserve has gotten better at responding to these events,” says Mark Rodekohr, a visiting fellow in the energy program at the Center for Strategic and International Studies, a Washington, D.C., think tank. “They have been able to manage the money supply better than they have in the past.”

In addition, inflation has been driven down from where it was a generation ago. During the Iran hostage crisis of 1979-80, the consumer price index stood at about 14 percent. Today, the inflation measure is around 3 percent.

Oil also plays a smaller role in the life of the U.S. economy today, according to Rodekohr. In the 1980s, energy prices accounted for 14 percent of GDP. Today, they come in at less than 10 percent.

But workers are devoting just as much attention to the cost of filling up their vehicles as they ever have in the past because it remains one of the most influential expenses in the family budget.

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