As if oil prices weren't already high enough...

From the Economist

Frozen by oil-price fears

The word petroleum has its roots in the Latin words oleum, which means oil, and petra, which means rock. The word petrified has the same root. As the price of oleum has soared, the links between fear and petroleum have become clear to economists as well as etymologists. …

When the oil price started to catch everyone’s attention in the spring, economists tried to put things in perspective. Prices would have to pass $80 per barrel in today’s money to match the oil-price peaks of 1981 in real (inflation-adjusted) terms, they pointed out. Besides, oil-consuming nations now use about half as much oil for every dollar of output as they did in the 1970s. Economists cited a common rule of thumb: a sustained $10 increase in the price of oil would knock 0.4% off the GDP of the rich, oil-consuming nations of the Organisation for Economic Co-operation and Development. It would cost America just 0.3% of GDP. A drag, but not a shock.

But as the price has continued to rise, these historical comparisons have looked less comforting. Moreover, economists are now worried that their rough-and-ready rule may not be linear: that is, a rise in the oil price from $45 to $55 may be more damaging than a rise from $25 to $35. Increasingly, economists are abandoning their rules of thumb and crossing their fingers instead.

If oil prices stay high in the year to come, might interest rates stay low? Most central banks around the world, with the notable exception of the European Central Bank, have set off on a course of monetary tightening. But they may stop, pause or delay along the way to cushion the impact of higher oil prices. Mr Greenspan gave no hint of such a pause on Friday. The problem is that oil-price shocks raise inflation even as they dampen demand. If workers press for higher wages to compensate for higher energy bills, an inflationary spiral can ensue. Central banks are thus reluctant to ease monetary policy in response to an oil-price shock, even one that slows the economy.

The “stagflation” (economic stagnation alongside roaring inflation) that was common in the 1970s is now a worry once again. But inflation remains at bay, for the moment at least. It would thus be too much to say that consumers and central bankers are petrified by petroleum. But as the price of oil sets new records, their rock-like confidence is beginning to crumble.