Why the Economy Can Withstand $100 Oil
October 30, 2007 03:16 PM ET
Pethokoukis, James


Forget the credit crunch and mortgage crisis for a moment. What about rising oil prices? So far, the economy has shaken off high prices at the pump, no problemo. But what if oil his $100 or more? Don't fret, says Jim Glassman of JPMorgan:

1) The sticker shock related to $90-$100 oil won't spark new alarms. That's because, for all intents and purposes, consumers already saw $100 per barrel oil this spring, when large numbers of refineries shut down for a long-needed maintenance, gasoline prices spiked above $3.00 per gallon, and retail margins temporarily widened to unprecedented levels.

2) Today's economy is better able to absorb the rise in the relative price of energy, because it is more flexible, it is still relatively strong, and we use energy far more efficiently than we once did so that oil is not as important as it once was. In addition, contrary to popular opinion, oil may be a "tax" initially, for consumers and net oil consuming countries, but eventually oil revenues get spent—recycled—if not in the spending stream, into financial markets.

3) $100 oil implies that [3 trillion] of petroleum dollars are cycling into financial markets annually today, compared with an annual flow of only $600 billion back in 2003 when oil prices were close to $20 per barrel.

4) OPEC shocks get a bad rap for the stagflation and recessions of the 1970s. In fact, oil may be guilty only by association.

5) High oil prices, as unhappy as they make us, are doing God's work, by curbing our appetite for carbon fuel, pointing us to greater energy security and limiting the impact of human activity on the environment. The decline in gasoline demand in response to rising energy costs is proof that markets work and that market mechanisms are our best energy policy.