Energy impact on global economy is understated.(SELECTED TOPIC)

The energy shock to economic growth will be felt worldwide through the increasing global imbalance between high investment and low consumer spending, according to an analysis by The Conference Board. The steady rise of global commodity prices since 2002 has been led by spiraling oil prices. There have been a number of additional factors motivating these increases: exceptionally low interest and inflation rates, a surge in emerging market demand led by heavy investment in China, the acceleration of global manufacturing activity in 2004, and a shortfall in natural resource investment for almost 20 years.

"The relationship between U.S. crude oil stocks and oil prices has become unhinged during the past year, probably due to new demand/supply factors heavily influenced by China," says Gail D. Fosler, Executive Vice President and Chief Economist of The Conference Board. These imbalances have generated major crises in the past, both in the U.S. and abroad, although there are important offsets--particularly by deep discounting in other prices. Despite recent dips in energy prices and holiday promotions, consumers across the U.S. will be hard hit in the short term. Says Fosler: "The recent energy shock is reminiscent of the 1970s. Rising gasoline prices have taken the energy share of consumer spending from about 4 percent in 2001 to 6.5 percent this September--the highest level in more than 20 years." While oil prices hit new highs during the recent hurricane crises, the recent surge was not sustainable and oil prices have already declined again. But current oil prices are stilt well above the level consistent with their long-term fundamentals. In the coming months, oil prices should continue to fall toward levels more consistent with long-term economic fundamentals. The effect of lower oil prices on natural gas and gasoline prices is based in part on their relationship to crude prices, since natural gas prices tend to lag crude oil prices. When crude prices rise sharply, natural gas prices spike briefly and then begin to decline. "Still, even if oil prices fall to $40 a ...