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The current paper will examine an article “Oil Price Surge Widens US Trade Gap” by Daniel Pimlott published in Financial Times dated 11 September 2008. The article discusses an important issue which the U.S. economy faces in the turmoil of high commodity prices. The surge in oil prices is imposing a severe threat to the U.S. economy as it attempts to survive the difficult period of financial structure meltdown and finally, it is encountering a long-delayed slowdown in economic growth.
In other terms, the U.S. is under recession and its impact can be seen throughout various sectors including the employment sector which have been highlighted by some interesting figures provided in this article. (Recession is referred to as a period of general economic downturn specifically a decline in GDP for two or more consecutive periods). (Furthermore, unemployment is an economic condition where individuals seeking jobs fail to get employed).
The article focuses upon the recent surge in oil prices and its impact on the U.S. economy. The U.S. economy which is the world’s largest economy has been hard hit by this surge in oil prices in addition to the financial crisis which the country is going through. The high oil prices have pushed up the import bill of U.S. imports of oil which has led to a heightened trade deficit which grew by 5.7% in July 2008 indicating a rise of US$3.4bn as compared to June 2008 soaring to US$62.2bn above economists’ expectations of US$58bn.
The import bill continued to grow to its highest level in the month of July as the prices of oil and other commodities reached their peak levels. However, it is also observed that both imports and exports of the U.S. continued to grow in contrast to the slowing economies of Europe and Asia including China, Japan, and India. This fact portrays the resilience and capability of the U.S. market to bounce back however with emerging markets continuing to compete in the international market and the continuing pressure on the U.S. economy may be too much to avoid the horrors of recession to repeat the 70 years old history. The U.S. economy has faced two recent recessions in 1999 and 2001 but their impact was not deep as the country is going through at present.
The oil price has shown a reversal in recent weeks showing the biggest drop of 3.7% well above economists’ prediction of 1.8% decrease in the month of August and was traded at recent lows of US$88 per barrel. The main reason for this slump has been negative expectations regarding global economies and recessions hitting the strongest economies of the U.S and Europe including Germany, England, and Spain.
The demand for oil is viewed to decrease as the growth rates have been shrinking across the globe and countries are struggling to save their economies from going into recession. In view of the financial collapse in the U.S. economy, the U.S. government has decided to support the ailing financial market by injecting funds of US$180bn and spurring the capital markets. But with this spurge in the capital market and expectation for improvement the oil prices have once again risen by US$11 per barrel after testing their current lowest. The falling import bill would in fact reduce pressures on the economy by supporting businesses and ease the inflationary pressure on consumer products.
The article also refers to a comment by John Ryding and Conrad DeQuadros of RDQ Economics who are of the idea that the credit crises in the financial market, declining inflation, and weakening economy would lead to the Federal Bank reducing the interest rate by the end of the current year. However, the inflation and commodity prices are still considered to be at higher levels compared to last year by almost 16%. Reductions are considered as short term and prices are still on the higher side.
The slowdown in the economy has also been felt across the employment sector. The construction and housing sector has been most affected by the current scenario. The labor markets should continue to weaken as business closures dampen the economy and financial markets continue to underperform. The unemployment rate in the U.S. has reached 6.1% and those seeking unemployment benefits have risen to 3.53m in the last week of August 2008. However, it has been argued that the economists have overestimated the effects of the U.S. economic slowdown on unemployment as new claims for unemployment benefit reduced in early September.
It can be concluded from the discussed article that the U.S. economy will continue to be affected by the rise in oil prices. Oil prices have seen a tremendous shift from US$50 per barrel back in 2003 to its ever high record level of US$146 per barrel in June 2008. The reasons for such price hikes have been driven by many global issues including tension in the Middle East, concerns over oil supplies from Nigeria and Russia, shut down of oil fields due to natural disasters, and moreover due to market speculations. The trade deficit has widened which is mainly due to the oil prices reaching ever high peak levels and showing no signs of long term stabilization. The overall impact is economic slowdown termed as great recession leading to tremendous job losses.
Works Cited
Pimlott, D. Oil price surge widens US trade gap. Financial Times, NewYork 2008. Web.
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