2007 energy outlook: costs up

Remember this? Motorists complaining at the pump as the price of gasoline rises. Airlines bumping up airfares to cover expensive jet fuel. And delivery services tacking on surcharges, reflecting a record price for a barrel of oil.

But it’s not just a description of this past spring. It’s also the forecast for next year, probably just when school lets out for the summer and motorists are starting to put more miles on the odometer.

“We could see close to $85 a barrel on crude next year,” says Phil Flynn of Alaron Trading in Chicago.
If the forecast comes true, energy could be a dominant factor in the economic outlook for 2007 because, unlike this year, the potential increases would come when the economy is expected to be struggling. It would thus be the wrong time for the equivalent of a tax increase, which is how economists describe a spike in consumer energy costs. And it could catch the Federal Reserve in the middle of an energy-fueled jump in the inflation rate: Usually, the Fed tries to counter inflation by raising interest rates, but in a soft economy, it would rather cut interest rates.

“If we get a surge in energy prices next year, then the probability of a recession increases dramatically,” says Dennis Jacobe, chief economist for the Gallup Organization in Washington. “It depends on how fast the rise takes place.”

Christian Science Monitor