Rising oil prices take their toll on U.S. economy

20-Jul-05

The US economy grew by 4.4% in 2004, the strongest performance since 1999. However oil prices, which surged to a new closing high of US$61.28 a barrel in early July, continue to hover above US$57 a barrel. Gasoline prices last week set a nationwide record of US$2.33 a gallon. This rise in oil prices since the end of 2003, has trimmed economic growth by around three-fourths of a percentage point this year. Economists believe that the year 2005 could witness a slower but still healthy pace of growth of almost 3.5%, However, many believe that high oil prices could crease, but not derail, economic growth in 2005. The U.S economy will continue to grow despite this setback from energy prices. Rising prices raise costs of production and reduce profits for firms. Businesses seem to have reassessed the profitability of some investment projects in the light of significantly higher energy costs. Also hurting US manufacturers is Beijing's practice of linking its currency to the dollar that has undervalued the yuan by as much as 40%. This makes Chinese goods cheaper in America and U.S. products more expensive in China. This has hurt U.S. sales overseas and has contributed to the loss of U.S. factory jobs. Americans have been facing burdened family budgets due to rising energy and gasoline prices. Higher inflation spurred by rising energy prices has reduced purchasing power and slowed spending. Though the economy seems able to withstand high oil prices, price fluctuations lead to uncertainty and could pose challenges to the economy's good performance.