The Bright News of High Oil Prices

Increasing oil prices is usually a death signal for the recovery of the economy. But, it may be different this time as the costs of crude oil appear more like an indication of better times.

Tensions about the nuclear program of Iran have forced crude oil prices higher to 11% in the last month to reach $123 per barrel. That strengthened worries that international hostilities may cut supplies and push Brent crude prices to more than $150 per barrel.

With such high oil prices, strengthening the economy all over the world may be difficult. Analysts said that even at its present rate, it can remove about 0.2 points from the economic growth figure.

At the same time that the sovereign debt crisis in Europe is  just starting to get better, the problem of oil appears to be the new headwind. However, the spike caused by Iran covers a bigger essential trend and, if military attacks are prevented, it does not seem to pose much risk. This means that there is some good news in the story.

Crude oil price history has been rising quickly and began in the early parts of October last year together with a slow improvement in the data of the economy specifically in the U.S. Prices of equities have grown together with the advancement of oil costs. When both increase together, it is usually a sign of a wide expansion of the economy. The index of Standard and Poor is up by 17% since the start of October and the international equity index MSCI has recovered its entire losses resulting from the debt disaster in the US during the previous summer.

Economists said that this shows that, of the 25% spike in recent crude oil price history, nearly half of this increase since the early parts of October is a reflection of stronger global demand. The factories worldwide are producing goods more quickly, a main signal of the strength of the economy which indicates that it is in a good shape to manage a supply cut from Iran compared to last year.

A firmer test is consumers can handle the higher gasoline prices because their spending pays for around 2/3 or 66% of the developed world’s economic output. In addition, that will be based according to gains in wages.

American wages have increased at a yearly rate of 5.7% in the last seven months until January. The average earnings per hour that will be soon reported in the monthly jobs report of the government is anticipated to move higher by 0.2% in the month of February compared to the last month.

Gasoline costs in the U.S. have increased more quickly than expected. They are now higher by 10% compared to their low levels in the past year with California already reaching more than $4 per gallon level of gasoline prices.

The surprisingly mild winter also contributed to a three-month decrease of 30% in natural gas prices. As this is the fuel utilized to heat the majority of homes in the U.S, average household energy bills have been largely reduced. Employment levels are also somewhat higher, which helps protect them against more expensive gasoline prices.

The jobs report of the United States for the month of February is set to post 210,000 additional new jobs. That will be the third consecutive month with more than 200,000 gains. Royal Bank of Canada’s chief US economist Tom Porcelli said that he will closely watch for growth indications in sectors that are high paying which will give more support to the spending of consumers.

By Chris Termeer