Loren Steffy, UH Energy Scholar
Oil prices have skyrocketed to a seven-year high, which in oil-centric cities like Houston, is reviving an decades-old debate: Are higher energy prices an inflation accelerator? Or does the economic benefit outweigh the costs?
Across much of Texas, higher energy prices generally benefit the economy. Sure, consumers pay more to drive, but higher oil prices mean more jobs, better salaries and overall economic growth.
Despite efforts to diversify its economy over the years, Texas still relies on oil and gas production for about 10 percent of its gross state product, and the industry provides about 250,000 jobs. That doesn’t even count the jobs in related businesses.
During the last oil boom, in the mid-2010s, the entire country benefitted from increased drilling activity in shale plays from South Texas to North Dakota. Back then, the economy prospered. Easy money allowed oil companies to expand production rapidly, tapping domestic shale formations using hydraulic fracturing, whose costs had decreased significantly. Rising energy demand boosted other industries such as steel fabrication, construction and transportation.
But this time may be different.
The skyrocketing price for West Texas Intermediate crude — at more than $80 a barrel, it’s risen 64 percent this year — has raised new concerns about energy prices’ impact on inflation. And this time, domestic producers are sitting out the boom, which mutes the benefits that typically come with higher prices.
In case you haven’t noticed, inflation has been on the rise for most of the year. It hit a 13-year high in September, surging 5.4 percent from a year earlier. Energy prices accounted for the biggest portion of the increase. On a monthly basis, food and energy contributed more than half of the 0.4 percent increase.
If you strip out food and energy costs, inflation rose 4 percent annually and just 0.2 percent from August.
In other words, right now, food and energy costs are playing an outsized role in the higher prices confronting many consumers.
Economists tend to focus on “core” inflation, which excludes food and energy, because prices for those items are volatile. In economic terms, they’re also “inelastic,” meaning that people are going to buy them regardless of the price.
That doesn’t mean, though, that they don’t matter. If you eat or drive, they may matter a lot.
Economists and financial forecasters use inflation as a long-term indicator of economic strength. You may buy a box of Fruity Pebbles regardless of the price, but you’re more likely to delay buying a car, getting a new outfit or taking a weekend trip to the Hill Country if prices are too high.
Such decisions can have a ripple effect through the economy and provide insight into long-term economic demand, and therefore, economic growth.
But higher oil prices can also put a drag on the economy because consumers pumping more of their monthly income into their gas tanks. Gasoline is almost $1 higher than a year ago, with the national average topping $3 a gallon for regular unleaded.
This time, though, it’s more than just oil and gasoline prices we must contend with. Natural gas has doubled, hitting a seven-year high in six months, heating oil is up 68 percent and coal is selling at record prices. Electricity costs, particularly in Texas, are likely to rise from the aftermath of February’s Winter Storm Uri.
Energy may not be considered “core” to inflation measures, its critical to consumer spending. The U.S. Labor Department estimates that 7 percent of household budgets went for energy in August
Almost 40 percent of American households are facing serious financial difficulties, including struggling to pay utility bills. For households making less than $50,000 a year, some 60 percent are struggling financially.
Little wonder then that the surge in energy prices is causing some economists to cut growth forecasts for next year. Some are even predicting that the price surge could push the U.S. and global economy into a brief recession.
The price rise is driven by surging demand as the global economy recovers from the effects of the COVID-19 pandemic, combined with supply shortages, in part because OPEC has refused to boost output and U.S. producers have heeded Wall Street’s call to curtail spending on new drilling and generate better returns for shareholders.
Oil companies aren’t just worried about angering investors, they’re also unsure how many big bets they should place on fossil fuel development at a time when more money and public sentiment is shifting toward renewables. They seem content to let prices spike in the short-term to avoid making investments that will sour over the long term.
The combination of rising prices and signs of potential slowing growth have prompted some economists to go so far as to raise the specter of the 1970s economic bogeyman, stagflation. An oil embargo by OPEC early in that decade led to a prolonged period of higher prices and weak economic growth.
We’re not there yet. Economic growth this year has remained strong, and unemployment has fallen, though it still remains above pre-pandemic levels. But the recovery has seemed shaky as new threats such as the Delta variant and persistent supply chain tangles have caused setbacks.
Stoking the fears that stagflation, or at least some modern-day malaise akin to it, may loom is the shifting focus of central banks, who seem to put a bigger priority on employment than keeping inflation in check these days.
Consumers, meanwhile, have remained generally pessimistic. The Conference Board’s index of consumers’ outlook for income, business and labor market conditions fell in August.
A separate measure of consumer confidence by the University of Michigan found that although expectations inched up slightly in September, they remain the lowest since 2013 amid concerns about rising prices.
This year’s surge in energy prices may not represent a repeat of the 1970s, but it isn’t a replay of the 2010s, either. Higher prices, especially if they linger, could stifle the economy recovery. With winter on the way, and higher heating costs looming for millions of U.S. households, the debate over whether energy prices contribute to inflation is irrelevant.
Keeping warm this winter is going to cost more, and so will driving to Grandma’s house for Thanksgiving. That, in turn, is likely to mean fewer Tickle Me Elmos under the tree at Christmas.
It doesn’t really matter if energy prices are considered “core” inflationary measures. They are core to most Americans’ household budgets, and the higher prices, if they remain unchecked, could have dire and much broader consequences for the economy.
Loren Steffy is a writer-at-large for Texas Monthly, an executive producer for Rational Middle Media and a managing director for 30 Point Strategies, where he heads the 30 Point Press publishing imprint. He is the author of five nonfiction books: “Deconstructed: An Insider’s View of Illegal Immigration and the Building Trades” (with Stan Marek), “The Last Trial of T. Boone Pickens” (with Chrysta Castañeda), “George P. Mitchell: Fracking, Sustainability, and an Unorthodox Quest to Save the Planet, The Man Who Thought Like a Ship,” and “Drowning in Oil: BP and the Reckless Pursuit of of Profit.” His first novel, “The Big Empty,” was published in May 2021.
Steffy is the former business columnist for the Houston Chronicle and previously was the Dallas (and Houston) bureau chief and a senior writer for Bloomberg News. His award-winning writing has been published in newspapers and other publications worldwide. He has a bachelor’s degree in journalism from Texas A&M University.
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