Americans are loudly grousing about $70 barrels of oil, $3 gallons of gasoline, and huge profits at Exxon Mobil (XOM), Chevron (CVX), and BP (BP). But the amazing thing is how robust the U.S. economy is in spite of high energy prices. Economists now say that estimates of the economy's growth in the first quarter could be revised upward to a nearly 6% annual rate. (To put that growth rate in perspective: If it lasted, which it won't, U.S. economic output would double in 12 years.)
True, the second quarter will be slower, and high energy prices are being partially blamed. Still, the surprise here is not that growth is moderating, but what hasn't happened -- namely, an inflationary blowoff or an outright recession induced by the 2005-06 oil shock.
CALLING SHERLOCK HOLMES. It's reminiscent of this famous passage from a Sherlock Holmes novel, The Adventure of Silver Blaze:
Inspector Gregory: "Is there any other point to which you would wish to draw my attention?"
Holmes: "To the curious incident of the dog in the night-time."
"The dog did nothing in the night-time."
"That was the curious incident," remarked Sherlock Holmes.
In late 2002, when oil had climbed to a then-worrisome $30 and gasoline was going for $1.38 a gallon, many experts and pundits raised their warning flags. One news story at the time said that if things went wrong, "oil could hit $35 or even $40 a barrel -- although it would have to stay at that level for several months to damage the economy." (The writer of that piece was yours truly; the publication was BusinessWeek.)
Some damage. Even after a slowdown from the galvanic first quarter, economists are predicting that gross domestic product will grow at around a 4% annual rate in the current quarter. Inflation isn't bad in light of the high energy prices, either, at around 3%.
GREENBACK UNDER ATTACK. It's true that the dollar has tumbled lately, losing 9% against Japan's yen and 7% against the euro since early March. But it's not costly oil that's hurting the dollar -- Europe and Japan are paying as much for energy as the U.S. is. The dollar's drop seems to have more to do with concerns about a slowing housing market and relatively stronger growth abroad.
The economy's good health puts a different light on the complaints from politicians and the general public about how high today's energy prices are. If gasoline is unaffordable, why isn't the damage showing up in the numbers? True, statistics show that people are drifting toward more fuel-efficient cars. General Motors (GM) announced on Apr. 12 that it was pulling its gas-guzzling original Hummer off the market.
But that kind of change is glacial. At the moment, people are actually consuming more gasoline than they were when prices were lower. According to the latest data from the Energy Dept., Americans consumed 2% more gallons of gasoline in the first week of May, 2006, than they did in the first week of May, 2005.
PEDAL TO THE METAL. Of course, not everyone can cut back on the miles they drive on short notice. Many people are stuck with long commutes, for example. But anyone can save gasoline simply by slowing down. The federal government says that every five miles per hour you drive above 60 miles per hour is like paying an extra 20 cents a gallon for gasoline.
Yet people aren't slowing down, at least in any broad sense. Take Maryland, where highway signs alert drivers that lower speeds save fuel. At the request of BusinessWeek, the Maryland Transportation Dept. put together data for six characteristic stretches of highway in the state, comparing average speeds this spring and one year ago. The combined change for the six was a decline of 0.27 miles per hour -- statistically insignificant.
To put it bluntly, behaviors haven't changed because for most Americans, gasoline prices just aren't high enough to make a difference. According to the Bureau of Labor Statistics, gasoline accounts for about 4% of a typical consumer's spending. A healthy chunk, to be sure, but less than the nearly 6% spent on, for example, recreation.
Sure, high pump prices aren't pleasant. But after surveying the evidence, it's hard to argue that they're a killer.