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Oil Price Distant From 1980s Agony When U.S. Income Adjusted

Oil at $110 a barrel is taking only half as big a bite out of Americans’ pocketbooks as it did in 1981, the last time Iranian shipments were disrupted.

The cost of a barrel of crude in the U.S., adjusted for total disposable income, was $107.92 in January of this year, compared with a peak of $213.44 in the same month in 1981, according to data compiled by Bloomberg (.OILINCM) and the Energy and Commerce Departments. Oil consumption was 4.8 percent of income in 2010, compared with 9.7 percent in 1981, the data showed.

For all the concern over the fallout from sanctions against Iran and the prospect of gasoline topping $4 a gallon in a U.S. election year, the distress caused by rising oil prices is being mitigated by improved household purchasing power, a strengthening economy and America’s growing energy independence.

“The threshold to withstand the run-up in energy prices is higher than most people think,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York, in a phone interview March 6. “We can tolerate fuel at $4. Job growth is stronger and incomes are looking very decent. The economy is on firmer footing.”

Gross domestic product grew at a 3 percent annual rate in the fourth quarter of 2011, the most since 2010, while unemployment held at a three-year low of 8.3 percent in February, raising the likelihood consumers will boost spending.

Oil futures for April delivery rose 82 cents, or 0.8 percent, to settle at $107.40 a barrel on the New York Mercantile Exchange, bringing the 2012 gain to 8.7 percent. The price exceeded $110 on March 1 for the first time since May 4.

Fighting Inflation

When adjusted prices reached an all-time high 31 years ago, Iran had stopped crude shipments following the seizure of the U.S. embassy in Tehran and the standoff over the fate of 52 American hostages. To fight accelerating inflation, Federal Reserve Chairman Paul Volcker allowed the federal funds rate to rise to 22 percent in July 1981, helping push the economy back into a recession that started that month and lasted 16 months.

Oil is rising again as Iran threatens to close the Strait of Hormuz, the transit point for about 20 percent of global crude cargoes, following the European Union’s Jan. 23 pledge of an oil embargo starting July 1 to pressure the Islamic republic to not build a nuclear weapon.

Concern that a surge in energy prices will push the U.S. into a recession is premature, according to Neal Soss, chief economist at Credit Suisse in New York.

Less Usage

“Higher gas prices don’t help, but before you get really nervous you need to see them go much higher,” he said on March 7 in a phone interview. “The economy will continue to grow through the year.”

Declining fuel use compared with past decades may also be helping Americans cope with increased prices at the pump. Household consumption of energy as a share of total spending was 5.6 percent this year, down from 8.9 percent in 1980, according to Riccadonna of Deutsche Bank.

The U.S. has reversed a two-decade-long decline in energy independence, increasing the proportion of demand met from domestic sources over the last six years to an estimated 81 percent through the first 10 months of 2011, according to data compiled by Bloomberg from the Energy Department. That’s the highest level since 1992.

Domestic oil output is the highest in eight years. The U.S. is producing so much natural gas that, where the government warned four years ago of a critical need to boost imports, it now may approve an export terminal.

Gasoline Prices

Retail gasoline rose to $3.793 a gallon in the week ended March 5, the highest level at this time of the year in records going back to 1990, according to the Energy Department. Futures on the Nymex have advanced 23 percent this year, settling at $3.314 a gallon yesterday. Prices may average $4 a gallon this summer and as much as $5 in some East Coast areas, Stephen Schork, president of the Schork Group, an energy-consulting firm in Villanova, Pennsylvania, said in an interview.

Confidence as measured by the Bloomberg Consumer Comfort Index (COMFCOMF) was minus 36.7 in the week ended March 4, the highest since April 2008, up from minus 38.8 in the prior period, according to figures released yesterday. Auto sales in February accelerated to a 15.03 million annual rate, the fastest in four years, from 14.13 million in January, according to Ward’s Automotive Group.

Payrolls Grow

The U.S. has added more than 200,000 jobs for three consecutive months. A report today showed payrolls rose by 227,000 in February, exceeding the median forecast of economists surveyed by Bloomberg News and following a 284,000 gain the prior month.

A modest increase in the hours worked and payroll growth at the recent pace would mean nominal disposable income grows by almost $500 billion this year, according to Soss of Credit Suisse.

While employment and the economy have dominated the presidential election campaign, exit polls show fuel bills are an increasing concern for voters. In Ohio’s March 6 presidential primary, 93 percent of Republican primary voters said gasoline prices were “a factor” in their vote, with 74 percent saying they were “an important factor.”

‘No Quick Fixes’

“Higher gas prices are like a tax straight out of your paycheck,” President Barack Obama told an audience at a Daimler Trucks North America plant in Mount Holly, North Carolina March 7. “You and I both know there are no quick fixes to this.”

Former House Speaker Newt Gingrich of Georgia promised in a Feb. 22 Republican presidential debate that as president he would pursue an energy program including drilling in the Arctic National Wildlife Refuge so “every American can look forward to $2.50 per gallon gasoline.” Fellow candidate Mitt Romney said Obama “has tried to slow the growth of oil and gas production in this country, and coal production” in a March 1 speech in Fargo, North Dakota.

Bloomberg’s numbers use the Energy Department’s monthly average price that refineries pay for imported oil, adjusted to reflect data on disposable income from the Commerce Department’s Bureau of Economic Analysis.

Even taking into account population growth, oil is cheaper today than it was three decades ago. Adjusted for per capita disposable income, prices peaked at $156 in January 1981.

Income Factor

“The income factor does play a role” in absorbing rising oil prices, said Sander Cohan, a principal at Energy Security Analysis Inc. in Wakefield, Massachusetts. “The reaction to higher energy prices is always a move toward efficiency.”

Unadjusted nominal import prices started to rise in 1979 to peak at $39 a barrel in February 1981, more than doubling from the $14.9 level of December 1978.

The Iranian Revolution, which began in late 1978, resulted in a drop in Iran’s oil production of 3.9 million barrels per day from 1978 to 1981, according to the Energy Department. That’s about 6.4 percent of 1981’s world oil production, standing at 60.6 million barrels a day, department data showed.

Production dropped further during the Iran-Iraq War, which started in 1980. By the following year output from the Organization of Petroleum Exporting Countries declined to 22.8 million barrels per day, 7 million barrels below its level for 1978, according to the department.

This year’s rise in global oil costs “is likely to push up inflation temporarily while reducing consumers’ purchasing power,” Fed Chairman Ben S. Bernanke said in semi-annual testimony to Congress on March 1. He also said policy makers expect inflation will remain “subdued.”

Gasoline’s gains are pinching Americans’ pockets just as the economy is gaining momentum, according to Neil Dutta, an economist at Bank of America Corp. in New York. The increase in fuel costs may trim as much as half a percentage point from U.S. economic growth, he said.

“The gas price story is damping growth prospects,” he said. “The economy is in a better place than last year, but it isn’t materially better. The increase in energy prices is a significant headwind.”

-- With assistance from Mike Dorning, Roger Runningen, Craig Torres and Carlos Torres in Washington and Edward Klump in Houston. Editors: Philip Revzin, Justin Carrigan

To contact the reporters on this story: Moming Zhou in New York at mzhou29@bloomberg.net; Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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