ABA Banking Journal - January 2008 - (Page 52) briefing The Economy CARL TANNENBAUM Chief Economist, LaSalle Bank/ABN AMRO, and a former chairman of the ABA Economic Advisory Committee $90 a barrel? No worry WHY IS IT, I WONDER, THAT WE marry people whose sense of temperature is completely different from our own? This natural phenomenon is most prominently on display at this time of the year, when the transition from summer to fall initiates fights in so many homes over the thermostat setting. My wife prefers to have the windows open at night until after Thanksgiving, bringing the overnight wind-chill to about 35 degrees. I wonder whether our relative sensitivity to the cold is genetic, or whether it arises as a reaction to living in partnership with someone else. Or, this year, it might be arising as a reaction to rising prices for energy, which could make the upcoming home heating season a hot one for household budgets. The price of crude oil has been hovering above $90 per barrel for the past several weeks, up a startling 50% since the summer. The usual suspects are being blamed for this: rising demand from emerging economies like China, instability in oil-producing areas like Iran and Iraq, and restricted supply from OPEC. Speculation is always cast as a villain, as the trading volume in oil futures is an order of magnitude higher than supply. While the severity of these factors can shift, reducing the pressure on markets, analysts seem to think that high energy prices will last through the winter. Tensions in the Middle East seem to be rising, and meteorologists are forecasting a colder-than-normal season ahead. This will send a chill through homeowners and motorists, who have been somewhat sheltered to this point. As the chart shows, gasoline prices have not fully reflected what is going on in the market for crude. Regular gasoline could soon cost well over $3 per gallon once again. The burden of higher energy costs acts as a tax on consumers, potentially crowding out other types of spending. els immediately following Thanksgiving were off, but not disastrously so. It takes a lot less oil to produce a unit of output today than it did a generation ago; and we’ve adapted to the high costs by shifting to smaller cars, pursuing alternative fuels, and emphasizing green architecture. While we’d Sapping energy? 100 Crude oil (left scale) Gasoline (right scale) 3.25 3.00 2.75 2.50 2.25 2.00 Jul ’05 Jan ’06 Jul ’06 Jan ’07 Jul ’07 ($$ per gallon) 3.50 90 80 ($$ per barrel) 70 60 50 40 Jan ’05 This had merchants a little more worried than usual about holiday sales; you may have noticed some stores starting their Christmas season promotions shortly after Halloween (There ought to be a law passed confining the holiday sales period to the weeks between Thanksgiving and New Year’s Day.) It should be noted, however, that energy prices have been elevated for a good portion of the past two years without inflicting too much damage on the economy. And in fact shopping lev- certainly prefer cheaper energy, the current situation may not be fatal for the expansion. The situation in my house may, however, be fatal for me. I fear that I will catch pneumonia one of these nights and not last until my wife agrees to put the blankets onto the bed. I’ve been reduced to sleeping in an overcoat and a stocking cap, and writing letters to OPEC begging for mercy. I’m more likely to get mercy from them than I am from my wife… BJ 52 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.