Oil Still Casts a Long Shadow

[Stocks-to-Watch]

Stocks closed up for the first time this week, as oil prices retreated from their highs. However, that doesn’t mean we are out of the woods, experts stress, as further increases could meaningfully impact the economy.

“Sharply rising oil prices impose a significant headwind for growth,” warned Alan Levenson, chief economist at T. Rowe Price, in a research note today. “Higher consumer energy costs in the fourth quarter of 2010 and the first quarter of 2011 are reducing consumer purchasing power by the equivalent of 1.0-1.5 percentage points of disposable income. A dip into savings and a pullback in demand have provided offsets.

“Assuming that crude oil prices stabilize near current levels – incorporating a persistently elevated level of uncertainty, no adverse (for oil production) turn of events in Saudi Arabia or Iran – our underlying economic outlook will remain intact,” he wrote in a research note today. “This is an assumption, not a forecast. We readily acknowledge that a continued rise in oil prices at their recent pace – particularly if accompanied by falling share prices, as was the case this week – would pose a significant threat to sustained expansion.”

David Wyss, chief economist at Standard & Poor’s also sounded a sober note about the potential threat of high oil prices. “The turmoil in the Middle East sent oil prices to more than $100/barrel, before prices eased slightly Friday. The spike has increased worries about a premature end to the expansion. The economic data this week was mixed, with the downward revision to real GDP and the drop in home prices somewhat offset by an upward revision to durable orders and a drop in unemployment claims. Overall, the expansion is likely to remain sluggish, and a further rise in oil prices could easily send us back into recession.”



Original Article Source by Barrons.com