–$5.00/Gallon Gasoline Presents A Different Set Of Risks

By Brai Odion-Esene

WASHINGTON (MNI) – Ratings firm Standard & Poor’s Friday said it
believes the U.S. economy can weather the impact should the price of
gasoline rise to $4.00 per gallon.

Many fear higher gas prices, pushed up by soaring oil prices, could
have a contractionary effect on U.S. economic growth as consumers cut
back on spending to compensate.

In a report, however, S&P said “We are inclined to conclude that
$4.00 per gallon of gasoline will not derail the U.S. economy, but
acknowledge that $5.00 per gallon presents an entirely different set of
risks, especially as we approach the summer peak driving vacation
months.”

According to the Energy Information Administration, the average
price of a gallon of gasoline hit $3.72 this week, up from $3.38 in
January.

“Despite this sharp increase in prices, consumers are not yet
showing any noticeable signs of vulnerability when it comes to
discretionary spending,” S&P said. It pointed out that, as of January,
consumer spending on clothing and accessories was up 5.3% versus a year
ago, spending increased 4.3% at sporting goods, hobby, book, and music
retailers, and the food and drinking establishment business increased by
8.2% year over year.

S&P argued that it seems other factors such as the declining U.S.
unemployment rate are offsetting potential risks to GDP growth
associated with rising crude oil and retail gasoline prices.

S&P added that while rising household energy expenses will, at some
point, become problematic for the U.S. economy, “We are, however,
slightly wary of the general notion that GDP growth would decline by 1%
if crude oil jumps to $140 per barrel in 2012 from roughly $99 per
barrel at year-end 2011.”

It noted that U.S. GDP growth generally remained between 2% and 4%
during the prior recovery cycle — 2002 to 2006 — a period in which
crude oil prices increased by 208% to $61.05 at the end of 2006 from
$19.84 at the end of 2001.

It did acknowledge that many other factors boosted economic growth
during the prior cycle, including job creation and the housing boom,
which helped offset any drags on domestic economic activity associated
with rising crude oil prices.

S&P stressed that while crude oil prices are currently heading
higher, “natural gas prices are at the lowest levels recorded in at
least a decade.

“While consumers are definitely paying more at the pump, many
consumers are benefiting from the lowest winter heating bills in years
due to the combination of natural gas prices and the exceptionally mild
winter in the northeastern U.S.,” it said.

Adding that consumer gasoline purchases currently account for less
than 5% of total personal consumption expenditures, S&P said based on
its analysis, “We find it difficult to believe that anything short of a
major price spike in a category of retail spending that accounts for
less than 5% of total personal consumption can represent a significant
threat to the overall economy.”

Should oil and gasoline prices continue to rise, S&P said it is
entirely plausible that additional incremental consumer spending on
gasoline — and household energy related expenditures in general — will
first come at the expense of various forms of discretionary consumer
spending.

“Consumers will be forced to divert money from non-energy related
categories of retail spending, many of which include goods produced
outside the U.S., to accommodate additional dollars spent at the pump
before we reach the point where rising gasoline prices place the broad
U.S. economy at risk of recession,” the S&P report said.

To avoid a recession and keep the recovery chugging along, S&P said
the U.S. economy now requires sustained disposable income growth, coming
from some combination of wage growth and tax policy.

** Market News International Washington Bureau: 202-371-2121 **

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