June 16, 2008
ECONOMIC NEWS: Cost of Living Up; Job Loss Claims Rise
Consumer prices in May were 4.2 percent higher than last year. The Bureau of Labor Statistics reported that the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.6 percent (seasonally adjusted) in May, due largely to surging energy prices. The rate of change in the CPI has increased significantly since August 2007. The year-to-year percentage change has jumped from two percent last August to approximately four percent during the past seven months. (See Chart) Changes in the CPI less food and energy – so-called core inflation -- held steady in May, rising at 2.3 percent year-to-year. Although core inflation is well below headline inflation, Fed Chair Ben Bernanke recently raised concerns about potential effects of raw materials costs on product costs, wages, and inflation expectations.
Unemployment claims rose by 25,000 in one week. Initial claims for unemployment insurance rose by 25,000 to 384,000 for the week ending June 7, according to the U.S. Department of Labor. Though the weekly initial claims number is volatile and subject to revision, the 4-week moving average for claims edged up 2,500 to 371,500. Claims have risen significantly since employers began shedding jobs in December and the 4-week average is now at the same level as it was on the eve of the 2001 recession.
Consumer sentiment dropped for the fifth straight month. The Reuters/University of Michigan Index of Consumer Sentiment dropped for a fifth straight month, reflecting deteriorating confidence in the economy. The preliminary June index of 56.7 contrasts sharply with the June 2007 index of 85.3 and late-1990s values consistently over 100. The survey also showed declining confidence in consumers’ own financial situation and a bleaker outlook for the future of the economy.
SNAPSHOT: Arctic Refuge Oil Production Would Have Little Effect on Gasoline Prices
The recent run-up in the price of crude oil has prompted new calls for the Federal government to increase its petroleum production by allowing exploration and drilling in the Arctic National Wildlife Refuge (ANWR) along the northern coast of Alaska. While there is a strong incentive to provide much needed relief to American families who are currently struggling with high gasoline prices, analysis of ANWR’s projected contribution to crude oil markets suggests that relief will be neither substantial nor timely in its effect.
The United States Geological Survey (USGS) has estimated that ANWR contains between 5.7 and 16.0 billion barrels of crude oil that can be recovered using current technology. A recent analysis by the Energy Information Administration (EIA) concluded that effective production from ANWR would not commence until 2018 if Congressional approval were secured this year. The ten-year time horizon reflects a number of intensive exploration, drilling, and infrastructure-building processes as well as operating complications that come from the harsh environment and remoteness of the region. Moreover, this projection does not include delays that would result from any legal challenges from environmental protection groups.
Crude oil production from ANWR would have a limited effect on the prices of crude oil and refined products. The additional crude oil produced in ANWR will have an effect on prices only insofar as it affects the global market for crude oil. According to EIA’s forecast, ANWR production will comprise a relatively small share of world oil consumption– between 0.4 and 1.2 percent — just 0.7 percent in the mean case scenario. (See Snapshot) They estimate that the additional crude oil supply from ANWR could decrease the relevant price of crude oil by between $0.41 (0.6 percent) and $1.44 (2.2 percent) per barrel in the years when it would have its largest effect. The effect on gasoline prices is smaller. Because crude oil makes up approximately two-thirds of the price of gasoline, pump prices will fall anywhere from 0.4 percent to 1.5 percent – or between $0.01 and $0.04 per gallon. Furthermore, this effect may be further muted if OPEC responds, as it has in the past, by cutting its own output by an equal amount.
Moreover, production from ANWR may have little effect on US dependence on crude oil imports. At its highest point, ANWR will produce anywhere from 510,000 barrels per day to 1,450,000 barrels per day, a boost of 9 to 25 percent in total US crude production. This additional production would lessen US dependence on petroleum imports by only 2 to 6 percent, with that share diminishing over time. Even in the best case scenario, crude oil imports would still make up 46 percent of primary supply in 2025, with a significant share of those imports likely emanating from OPEC nations.
These nominal efficiency gains may well be offset by damage that could occur to the environment as a result of opening ANWR to oil exploration and drilling. Alaska is already familiar with the risk posed by transporting crude oil across its landscape; pipeline leaks and the devastating oil spill from the grounding of the Exxon Valdez imposed very real and often times incalculable costs to the local environment and its wildlife. Certain drilling techniques can also endanger the permafrost, which could threaten both plant life and the structures built upon that ground. At best, the environmental impact may be limited, but the very real risk of ecological damage becomes central to this argument in light of the relatively small benefits afforded by production in ANWR.
THE WEEK AHEAD
|Tuesday, Jun 17||Housing Starts and Building Permits (May 2008)|
|Producer Price Index (May 2008)|
|Industrial Production and Capacity Utilization (May 2008)|
|Thursday, Jun 19||JEC Hearing — U.S. DRUG POLICY: AT WHAT COST?|
|Room 106, Dirksen Senate Office Building, 10 a.m.|
|Leading Indicators (April 2008)|
|Friday, Jun 20||Regional and State Employment and Unemployment (May 2008)|
ECONOMY AT A GLANCE
|Economic Activity||May||Apr||Mar||Feb||Q1 2008||Q4 2007||Q3 2007||Q2 2007||2007||2006||2005|
|Real GDP (% growth)||0.9||0.6||4.9||3.8||2.2||2.9||3.1|
|Unemployment (% of Labor Force)||5.5||5.0||5.1||4.8||4.9||4.8||4.7||4.5||4.6||4.6||5.1|
|Labor Productivity Growth (%)||2.6||1.8||6.0||2.7||1.8||1.0||1.9|
|Labor Compensation Growth (%)||3.0||3.4||3.1||3.5||3.4||3.1||3.3|
|CPI-U Inflation Growth (%)||7.4||2.4||3.7||0.0||4.3||5.0||2.8||4.6||2.9||3.2||3.4|
|Core CPI-U Inflation Growth (%)||2.4||1.2||2.4||0.0||2.5||2.5||2.5||2.0||2.3||2.5||2.2|