The White House is monitoring rising oil prices but is not expecting a repeat of "oil shock" conditions in 1979, when petroleum prices spiked in the wake of the Iranian Revolution.
The buffers that make the US economy better prepared to absorb oil-price hikes, says Austan Goolsbee, chairman of the President's Council of Economic Advisors, are low overall inflation and strong consumer confidence. “The impact of oil prices comes from longer-run, sustained increases to price, and not from short-run variations.
He added that "anything like what we are seeing so far" has not led either private or government economists to predict conditions "that would derail our economy." Mr. Goolsbee, spoke Thursday at a Monitor-sponsored breakfast for reporters.
“The way the economy works is not a cliff. There is no sense in which the price of oil gets to $119.99 [a barrel] and when it hits $120 then it goes into recession. That is not accurate. I do think there are some psychological impacts … the price of gasoline is a very public price,” says Goolsbee. On Wednesday, oil prices hit $100 a barrel before settling a bit below the $100 mark.
Goolsbee cited two key reasons for his sense that the US is well positioned to deal with short-term hikes in oil prices stemming from the current upheaval in the Middle East.
First, consumers are in a confident mode. “You saw this week that new consumer confidence numbers came out. They were very strong – the highest in three years. Consumer confidence of what the employment situation would be was the highest since 1984, I believe. So we start from a more optimistic place for 2011 than we have been in some time,” Goolsbee said.
Second, the US now uses less energy per dollar of economic output than in 1979. “Fuel costs are something like 10 percent or less of consumer expenditures, and overall inflation – consumer price index inflation – remains very low. And the Fed continues talking about the risks of deflation. So we are monitoring the oil price issue, but it should be taken in the broader context of overall consumer inflation,” Goolsbee said.