Will oil prices slow down the economy?

Oil prices have been rising since the end of last year to a six-month high, and have risen steadily higher for the past two months. Worldwide issues with supply have hampered attempts to pull down prices. The OPEC strategy to increase crude oil prices by limiting output seems to be working. In addition, domestic issues in countries like Lybia, Nigeria, and Venezuela, are affecting oil supplies. Finally, US sanctions against Iran, and a recent decision to allow Iran oil exemptions to lapse, have further crimped supply.

Experts have stated that (Brent) crude oil prices could spike up to the $80-$85 per barrel range (from the current $75 per barrel value); however, this is not likely to be a permanent condition, as the coming global economic slowdown is expected to reduce demand. Furthermore, while US oil output is currently affected by a lack of pipelines in the West Texas Permian Basin, that condition is expected to be resolved later this year. With the increase in output by the end of the year from Texas, crude prices are expected to fall back to last year’s values.

What do oil prices have to do with the economy? Primarily, the effect would be to reduce consumers spending, due to higher gas prices which are expected to peak in the summer months. Could gas prices slow down the economy? When you consider that 70% of the economy is driven by consumer spending, the cumulative effect of a significant increase in gas prices could provide a drag on economic growth, which could lead to other negative economic effects.