Rising prices for crude oil and gasoline have alarmed many consumers and put President Bush and other U.S. politicians in a position where they feel they have to do something -- anything -- in response, especially in an election year. But members of Wharton's finance department and private-sector economists say it's a good time to shun hysteria, take a deep breath, and look rationally at the reasons for the price hikes and their likely effect on the economy and on energy policy.
Higher prices are crimping the pocketbooks of motorists who are now paying $3 per gallon or more at the pump, up from about $1.50 in January 2003. Gasoline prices, which could continue to rise this summer, will have a ripple effect throughout the economy in the weeks and months to come and will dampen GDP (gross domestic product) growth in 2006. Indeed, a recent survey found that one group of American CEOs sees rising energy costs as the biggest threat to the world economy over the next two years. And as long as the United States continues to rely on oil producers in unstable parts of the world, high prices and price volatility will be the norm, these experts say. Bolivian President Evo Morales's decision, announced this week, to nationalize the country's natural gas sector, only underscores that point.
Still, several factors are working to mitigate the effects of higher energy prices on American wallets and psyches. For one thing, prices at the pump today are not as high, in relative terms, as in some past periods, and some forecasters see oil prices falling from a record $75.17 per barrel on the New York Mercantile Exchange the week of April 23 to below $65 a barrel in 2007. In addition, the U.S. economy is not as dependent on oil for GDP growth as it was in decades gone by because it is now much more of a service economy than an industrial one.
Prices of oil and gasoline are rising for any number of reasons: the growing demand for energy by the burgeoning economies of China and India, as well as developed automobile-dependent economies like the United States; a dearth of U.
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