Energy
prices have been coming down this spring as fears of a Middle East
blowup fade. But persistent global demand, tepid supply growth and
easy money mean it may not be long till the next damaging spike,
Goldman Sachs economists say.
Oil
prices could surge again by the end of 2012, economists Jan Hatzius
and Andrew Tilton wrote in a note to clients this past weekend.
They say the snail-like pace of global oil supply expansion – which
Goldman projects at 1% or so annually – can't keep a
petroleum-addicted world economy rolling without prices rising,
perhaps sharply.
So
don't get too used to paying a mere $3 and change for gasoline.
Higher prices are on the way soon enough, thanks to stretched
supplies and a Federal Reserve spigot that is likely to remain wide
open for years to come.
"The
fundamental story of increased oil scarcity is unchanged, and our
commodity strategists now see distinct upside risks to their
current forecast of $120/barrel for Brent crude by late 2012,"
Hatzius and Tilton write. "So the impact of scarcer oil and higher
oil prices on economic activity remains at the top of our list of
worries."
What
makes higher oil prices almost inevitable is the depth of the jobs
deficit in the United States. Unemployment is officially 9% but is
more like 13% if you consider the low rate of labor force
participation, says Bernstein Research strategist Vadim Zlotnikov.
That number has fallen this year to levels not seen since 1985.
High
joblessness and weak inflation will keep the fed funds rate near
zero at least through next year and perhaps longer, Hatzius and
Tilton write. That should help keep pushing unemployment slowly
toward its long-run average of around 6% -- but at the expense of
further dollar depreciation, stronger global demand and,
ultimately, higher oil prices.
So
the selloff that has taken the crude price down to $100 or so in
New York and $112 in Europe, where Brent is traded, may persist
through much of 2011. But it won't last forever, Goldman warns.
"The
only way to bring both the labor market and the oil market into
equilibrium is likely to be through a further increase in the real
oil price," the Goldman economists write. "This would presumably
increase oil supply by making exploration and production more
attractive, and reduce oil demand by increasing energy
efficiency."
They
add that this policy trade-off is often unfairly portrayed as
transferring income from the poor to the rich. The Goldman
economists concede that those in the bottom fifth of the U.S.
income distribution spend more of their funds on gas than do those
in the top fifth, by 4.6% to 3.5%.
But
they note that those losses by the poorest consumers are offset by
the job creation enabled by the loose Fed policy, which "will lead
to significant gains in real income for a subset of households
drawn disproportionately from the lower end of the income
distribution."
And
while no one is likely to turn cartwheels about higher oil prices,
Hatzius and Tilton point out that there's an obvious way for the
United States to turn that trend in its favor: By imposing higher
taxes on energy use.
In
doing so the government could both hold down consumption (through
higher prices) and boost federal revenues (which could use some
boosting nowadays, you may have noticed), mostly at the expense of
foreign governments that are at best our frenemies. But needless to
say, something that makes that much sense has about as much chance
of seeing daylight in the current Congress as the return of
dollar-a-gallon gas.