I received the following question today:
Question: How can the economy get better, when every time there is a hint of recovery, oil prices go up?
Answer: High oil prices are one of the reasons that the economy slipped in the first half of 2011 and continues to struggle today. Unfortunately, we now have Europe and our own debt debate added to the many icebergs we must negotiate in the weeks and months ahead.
Moreover, oil prices are not likely to fall dramatically, short of another full-scale financial crisis like the one in 2008. One of the biggest issues is the “Arab Spring” and the subsidies that monarchies in the Middle East are paying their populations to avoid uprisings there. This has raised the floor on oil prices because those governments use oil revenues to pay for the subsidies. Losses in production from Libya are also a problem. In general, the OPEC countries are holding back on production.
Bottom Line: Oil prices are likely to remain high, and if the payroll tax cut, which helped blunt the blow from those costs to consumers, is not extended, then prices at the pump are likely to be a problem for some time to come. The reaction has been deflation and deep discounts in other areas, such as clothing prices. That brings down the overall rate of inflation, but does not cure what ails us. I wish I had a better answer.