Monday, October 01, 2007

WSJ reporters say economy is strong

By PETER FRITSCH and KELLY EVANS

For all the concern, the world today is better equipped to swallow expensive oil than it was when Jimmy Carter was installing solar panels and a wood-burning stove in the White House.

The main reason has to do with what some call the Wal-Mart effect. For every extra dollar taken from drivers' pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere have put roughly $1.50 back in the form of cheaper retail goods. Even at today's near-record prices, U.S. households today spend less than 4% of their disposable income at the pump, vs. over 6% in 1980.

Current prices are also a reflection of a strong economy, not an oil embargo or war in the Middle East. Since a market-share war between Saudi Arabia and Venezuela flooded the market with oil and drove prices to below $11 a barrel in 1998, oil prices have risen nearly eight-fold. During that run, the global economy grew roughly 5% each year.

Strong growth in places like China helps take some of the edge off the oil-price blow for U.S. and European companies such as Detroit's Big Three auto makers. Many emerging markets are hitting a "takeoff" stage, where per-capita income reaches a level that sparks serious auto demand, says Ellen Hughes-Cromwick, Ford Motor Co.'s chief economist. Growth in emerging markets is a "structural development" that is "less sensitive to oil-price changes," she says.

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