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Oil Prices & the Economy

PAUL KANGAS: Oil prices surged again today, with October light-sweet crude gaining 58 cents in New York to close just shy of $29 a barrel. Prices are hovering near their highest level since September 11, and the increase is fueling a debate about the effect on the economy. Suzanne Pratt reports.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: For days now oil prices have been flirting with $30 a barrel on fears of a U.S.- Iraq war. And with the U.S. economy already on shaky footing, some experts are worried those higher prices might even threaten recovery. In fact, economists frequently note that several of the last recessions were preceded by a spike in oil prices. Many explain that not only are corporate profits vulnerable, especially at airlines, but they say higher oil prices can also act as a tax on household income and ultimately hurt consumer spending.

LAKSHMAN ACHUTHAN, ECONOMIC CYCLE RESEARCH INSTITUTE: This is the critical thing. They must persist for more than a couple of months. That will start to have a real impact on the economy. But I think we're a long way from that right now.

PRATT: Others say it doesn't matter how high oil prices go. And it doesn't matter that fears of a double dip recession are rising, that's because they say the economy's vulnerability is dependent on its future potential, not its most recent performance.

ACHUTHAN: The future performance right now, we're headed up. We are in a cyclical upswing an expansion, and so a shock like an oil spike cannot hurt us a much as it normally or otherwise would.

PRATT: It could get a bit clearer in the coming weeks just how high oil prices may go in the event of war. That's because OPEC's next meeting is scheduled for September 19, and at that meeting oil ministers are expected to set production policy for the fourth quarter. Suzanne Pratt, "NIGHTLY BUSINESS REPORT," New York.