...[W]hen oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true.
Another reason consumers had been largely shrugging off the oil price increases of the last few years is that they could afford to do so, since energy expenditures had fallen so significantly as a fraction of total income. However, as a result of rising oil prices, that, too, is no longer the case.
We've reached the point where American businesses and consumers simply can no longer afford to ignore the price of fuel, and we're getting clear indications of real changes in behavior. Counts of the number of cars on the roads suggest that U.S. vehicle miles traveled fell 4.3% in March. U.S. gasoline consumption so far in 2008 has been 70,000 barrels/day lower than in the first five months of 2007. And sales of SUVs are crashing. Sales of light trucks manufactured in North America last month were 26% below the level of May 2007.
BLS seasonally unadjusted establishment data indicate that the number of Americans employed in motor vehicles and parts manufacturing fell by 107,000 between April 2007 and April 2008, which is bigger than the 88,000 decline between April 1990 and April 1991. GM this week announced plans to close 4 North American plants, idling an additional estimated 8,000 workers. Ford plans a 15% cut in its 24,000 salaried employees.
Continental Airlines announced plans to cut 3,000 jobs in response to higher fuel prices, following similar announcements from United, Delta, and American Airlines. Based on the experience in earlier oil shocks, we can anticipate that there will be broad changes in many other categories of business and consumer spending that will pose challenges to a number of affected industries.
Is America's economy able to dodge a recession at this time? Hamilton's conclusion: he's not sure.
Chinn's post, Oil Prices in Other Currencies, is quite short and compares oil prices in terms of the US dollar, the Euro, and the Special Drawing Rights (SDR)* from 2000 through 2008. Chinn concludes that the US dollar is helping to raise the price of oil due to its devaluation, especially with respect to the Euro and SDR, but that other factors have driven the price of oil up much more significantly than the dollar's devaluation. (I wrote a similar post back in March that came to the same conclusion despite looking at a much shorter time frame.)
Be sure to check out the two posts directly; I haven't used any of the graphs that Hamilton and Chinn incorporated into their posts here. Looking at the graphs might be helpful to you.