U.S. economy less exposed to oil price shocks

U.S. economy less exposed to oil price shocks
UPI

June 20 (UPI) — The price of oil is vulnerable to spikes from geopolitical events, though the U.S. economy seems only modestly at risk, an economist at the Dallas Fed said.

The U.S. economy is expanding at a rate above 2 percent, jobless rates are at historic lows, and wages are improving, though some metrics indicate wages aren’t keeping up with inflation. Consumer fuel prices are nearly 22 percent higher than they were last year.

The price of oil touched a multi-year high earlier this year at $80 per barrel for Brent, the global benchmark for the price of oil. Robert Kaplan, the president of the Federal Reserve Bank of Dallas, said in an essay published Tuesday that instability in places like Libya and Venezuela, both members of the Organization of Petroleum Exporting Countries, has the potential to put a risk premium behind the price of oil.

“In a global market that is in relative oil supply/demand balance, supply outages due to geopolitical events have the potential to cause sporadic episodes of spikes in oil prices,” his essay read.

Economists and the Dallas Fed calculated that the U.S. economy, however, is less vulnerable to fluctuations in the price of oil than it was in the 1970s. Oil shocks triggered by a surge in demand or a lack of supplies usually precede an economic recession, but Kaplan said the energy sector component of a U.S. economy supported by large oil reserves of its own is something of a buffer.

“The U.S. economy is less oil-intensive than in the past due to substitution for oil by other forms of energy, improved fuel efficiency and growth in the less-energy-intensive services sector as a share of the overall economy,” he added.

Dallas Fed economists said the economy in Texas, which hosts some of the largest shale oil basins in the country, is expanding at a solid pace. A forecast for employment in the state predicts growth of around 3.3 percent for June, down 3.6 percent from last month, but well above last year’s average.

The price of crude oil will move later this week when OPEC members make determinations on future supplies. Because the market is tight, it’s vulnerable to risks from outages from countries like Libya and Venezuela. Facing U.S. sanctions, Iranian oil barrels will leave the market in November.

The Oxford Institute for Energy Studies in a report published earlier this week called for a “cautious approach” with OPEC increasing production only gradually ahead of its year-end meeting in November.

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