The Crude Oil Question

As other aspects of the economy have gotten stronger lately, the price of crude oil has also been headed upward. Many people in the media are quick to ascribe these prices to the good economic news, and while things are probably not that simple, at the same time there is probably something to it.

The logic goes like this: As the economy comes back to life, more people will have jobs, and be able to afford bigger houses, and drive to work and go on vacation. All those things increase fuel consumption. Following a report last week that new-home sales had risen 27 percent, crude-oil futures jumped 1.7 percent in a single day. A barrel of crude oil now costs more than $85 for the first time since October 2008.

Here we see one of the downsides of the growing economy. No one wants to pay more at the gas pump, or more for heating fuel next winter. And the rise in oil prices may result in an increase in the inflation rate; although energy prices aren't included in what's called core inflation, they are a factor in the Consumer Price Index employed by the Federal Reserve. And of course, rising gas prices tend to cause an increase in other prices, such as for goods that need to be hauled by trucks. So while the rise in crude oil prices may reflect the growth in the economy, it could paradoxically be a factor in its eventual slowdown.