Yesterday benchmark West Texas Intermediate (WTI) crude rose 45 cents to $102.24, while Brent crude, which is used to price foreign oil imported by U.S. refineries, rose $1.08 to $120.01. The price of WTI has risen more than 3% since the start of the year and is nearing the 9 month intraday high of $103.73. The increase in Brent has been even steeper, up nearly 12%.
The reason for this recent move higher in oil prices is due to heightened tensions between Iran and the West over the Iranian nuclear program. The U.S. and Europe are using sanctions to pressure Iran to abandon its nuclear program, which they fear will be used to develop a bomb. Iran denies the claim.
Iran relies on oil exports for about half of its revenue and the European Union (EU) buys about 18% of Iran’s total crude exports. Iran has threatened to cut off oil supplies to Europe to retaliate if the EU embargo that the EU plans to implement this summer.
As a result of higher oil prices, last month was the most expensive January ever for retail gasoline in the US as prices averaged out at $3.37 a gallon, according to the Oil Price Information Service. That’s compared with the previous record average for the month of $3.095 a gallon set last year.
Higher prices at the pump are a cause of concern for the US economic recovery. If consumers are spending more on gasoline, they will have fewer funds for other purchases. In an economy where consumer spending accounts for roughly 70% of the nation’s economic activity, low gasoline prices are important for economic expansion to occur.
The standard rule of thumb is that a $20 increase in the cost of a barrel of oil, roughly WTI oil’s move in 2011, shaves about 0.4% off growth and boosts unemployment by 0.1%. To give the situation some context; last year’s gasoline price increase cost the US about $125 billion, which would be enough to negate the effects of the just-agreed-to payroll tax holiday.
What do you think? Do you think oil prices are headed higher? If they are do you think higher prices will hurt the economic recovery? Join the discussion at TheStockEnthusiast.com after the break!
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