High oil prices affect economy, consumers

As unrest in the Middle East and in northern Africa continues, certainty about the future of crude oil supplies has brought about dramatic price increases. According to figures released last week by the International Energy Agency, the U.S., Europe and Japan might have to spend almost $200 billion more on imports of crude this year than they did in 2010.

IEA chief economist Fatih Birol told The Wall Street Journal that, if the price of oil averages $100 a barrel this year, the U.S. would have to spend a total of $385 billion on oil imports. This is an increase of almost $80 billion over last year.

Economists say this increase in prices will effect different sectors of the economy differently. Dr. Alka Gandhi, who teaches economics at the University of Maryland, says average American consumers don't change their habits very easily when oil prices increase.

"We know that Americans generally don't respond a great deal to high gas prices (as a result of high oil prices) so almost as much driving, etc. is still likely to occur to a point," said Gandhi.

But there are some changes that consumers have made in the past in response to high gas prices, Gandhi says.

"When we saw such high gas prices a few years ago, the Metro, for example, had the highest ridership it had ever seen, even controlling for population, so at some point people did began to respond," said Gandhi.

The real danger, economists say, is what the high prices will do to consumer confidence, "which the U.S. economy desperately needs for sentiment to improve," Birol told the Wall Street Journal.

Most economists agree that there has not been a real disruption in oil supply yet, and the recent price spike is due mostly to fear and speculation that this could happen in the future. Since Libya is a major supplier of U.S. oil, the violence in that region has some worried of supply shortages.

The price of crude jumped 15 percent as Libya's violence flared up, reaching $120 a barrel on Feb. 24.

"The Saudis have said they will supply anything Libya can't. Even if you take other countries like Yemen and Oman out of the equation, there is not going to be a short-term fall in supply," said Doug Ober, CEO of Petroleum & Resources Corporation, in an interview with CNN.

These assurances from Saudi Arabia have caused prices to settle somewhat. Crude was at $113 per barrel on March 11. This is 20 percent higher than at the beginning of the year, but still well below the peaks of 2008.

Such price fluctuation is here to stay, at least for the foreseeable future, says Gandhi. She says it will take much more than price shifts to make real changes to the way Americans use oil.

"The only way that we will see big changes in the way oil is used is if the spike in prices lasts for a long time, i.e. this turmoil in oil-producing countries continues or permanently changes the oil industry," said Gandhi.

"In that case, firms and people will have enough time to adjust to these higher prices by finding substitutes for oil or changing their production processes to use less oil," said Gandhi.