Monday, November 28, 2011

Do 2012 Economic Forecasts for U.S. Foolishly Discount High Cost of Oil?

The U.S. economy is predicted to grow by 2.0% in 2012 by the OECD and numerous economists. However, these forecasts may be overly optimistic if the price of oil remains at $100 per barrel. Given the likely softening of demand for U.S made products from Europe and reduced employment by municipal and state government, growth in the U.S. economy probably can only occur if the average price of oil drops back below $80.

The cost of oil has a huge impact on almost all facets of the U.S. economy. Food costs are directly impacted by the price of fertilizer and transportation. Oil is still used by 6.3 million U.S. households for heating.  Any business that has travel or shipping costs is impacted by transportation costs. Over 6,000 products are made from petroleum, including all plastic products. And of course, every household's budget is impacted by transportation costs. Given that the U.S. consumes over 17 billion barrels of oil annually year, the difference between $80 and $100 oil is the equivalent of a $340 billion tax on the economy, and the price of gasoline  has a huge impact on consumers sense of economic well being

Given all the other headwinds faced by the U.S. economy, if oil stays at $100 a barrel in 2012 or goes even higher it is unlikely that the U.S economy will meet the 2% growth projections of many economists. The U.S. stock market has declined the two times oil spiked over $80, both in 2008 and again in July and August of this year. It may very well do so again in the first quarter of 2012 if oil stays around $100 per barrel.

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