Oil prices are rising towards $70 a barrel, a burden that is bearable for the US economy for the time being, but it will cause trouble if oil prices continue to rise.

The last time US oil prices hit $70 a barrel was when oil prices plummeted in 2014. At that time, many investors thought that oil prices would stabilize or even pick up soon. Instead, oil prices continued to dive, finally bottoming out in 2016, hitting $26 a barrel. The slump has felt real pain for oil producers, and its impact has spread to the stock market, bond market and even the economy as a whole.

Photo Source: https://pixabay.com

The rise in oil prices this year reflects the changes in the market in recent years. Global economic growth has accelerated and unemployment in the United States has fallen. With the help of the surge in demand, the production reduction strategies of the world's large oil-producing countries have successfully eliminated a large amount of excess supply.

Oil prices have risen more than 60% since last summer's lows, and us oil producers are now exporting more oil than ever before.

For now, some investors believe that the range of oil prices could be good for the US economy, supporting the recovering energy industry without weakening demand.

However, even if the US economy continues to grow steadily, rising oil prices will reignite concerns. If the rise in oil prices continues, it may start to hamper economic growth. Higher consumer prices for gasoline and other energy products amount to a tax, pushing up inflation and increasing the incentive for the ∶ Federal Reserve to raise interest rates more aggressively.

That, in turn, could be a drag on economic growth and depress stocks, which are already suffering from trade tensions, rising bond yields and recent volatility. Inflation concerns pushed 10-year Treasury yields to their highest level since 2014 on Friday, while major US stock indices closed lower, giving up most of the gains driven by a series of recent upbeat corporate performance.

Joseph LaVorgna, chief economist for the Americas at Natixis, NTXFY, says nothing can drive cash out of the US economy faster than rising oil prices.

Jason Thomas, head of research at Carlyle Group, CG, said the energy industry's financial woes began to spread when oil prices fell below $40 a barrel.

But if oil prices continue to climb, it could exacerbate inflation expectations, raising Treasury yields and funding costs.

Thomas said that the market is beginning to move away from the "Goldilock" range, and that a further increase in oil prices of $10 to $15 a barrel would be a drag on the economy.

Us President Donald Trump tweeted on Friday that oil prices had been artificially pushed up to very high levels. This view was inconceivable even a few months ago. The statement sent oil prices down sharply, but later regained their lost ground, settling at $68.38 a barrel on the day.

A major force driving up oil prices is a policy shift by the Organization of Petroleum Exporting countries (Organization of the Petroleum Exporting Countries), or ∶ OPEC. In 2014, OPEC chose to maintain its high production policy to protect its market share from being eroded by US shale oil producers. But two years later, OPEC changed course and reached a joint production reduction agreement with Russia and other major oil producers, a move that largely reversed the supply glut in the oil market.

Antoine Halff, a senior researcher at Columbia University's Center for Global Energy Policy (Columbia University's Center on Global Energy Policy), says the topic is changing. He said that when it came to oil a year ago, the topics were "chronically low oil prices" and "an era of adequate supply", but now "the idea that oil prices will remain low forever is being challenged".

The global economic boom is also a key factor, keeping demand buoyant as global consumers consume excess oil and fuel supplies. Goldman Sachs Group (Goldman Sachs) said the year-on-year growth in oil demand in the first quarter of this year was likely to be the strongest since the fourth quarter of 2010.

But higher oil prices could also hit demand. This summer, motorists are likely to pay the highest price of gasoline since 2014. Deutsche Bank believes this is likely to offset the financial benefits of tax cuts for low-income families this year and could further erode disposable income.

Ann-Louise Hittle, vice president of oil markets at research firm Wood Mackenzie, said ∶ "overall, the consumer side of the economy will feel the impact as oil prices rise." The effect of rising gasoline prices is similar to that of tax increases. "

Photo Source: https://pixabay.com

Some analysts believe that fears that higher oil prices will weaken demand are overdone.

First of all, oil prices are rising gradually. Gasoline prices are still well below their 2008 highs, when the national average broke through $4 a gallon.

Demand remains strong at a time when oil and fuel prices continue to rise. Many analysts believe that oil prices have not risen enough to bring about a major change in consumer behaviour.

At present, the United States is expected to overtake Russia as the world's largest oil producer, and many parts of the US economy will benefit from higher oil prices. Overseas oil prices are higher than domestic oil prices, making it more profitable for American producers to expand their crude oil exports. The Brent crude futures contract, the global oil price benchmark, climbed to $74.06 a barrel on Friday.

Joseph Tanious, a senior investment strategist at Bessemer Trust, said that in the past, every oil price rise was due to supply constraints, and the United States was subject to overseas oil supply, but now domestic oil production is rising, which is of great significance. A modest rise in oil prices may also bring some positive results.

Although the response to the rise in oil prices has been slow, the share prices of energy companies have been boosted. Credit Suisse analysts believe that oil and gas stocks have become the most valued stocks in the U. S. stock market. Energy stocks are up 1.5 per cent so far this year and nearly 10 per cent in the past month.

But even some producers are worried about the impact if oil prices stay at high levels for too long.

Pioneer Natural Resources Co. Chairman Scott Sheffield said at an energy conference last week that ∶ "then demand will decrease and people will switch to alternative energy sources. I don't think it will benefit anyone if the oil price rises to $70 or $80." "

By Stephanie Yang and Alison Sider

Copyright (c) 2018 Dow Jones Company. The copyright of this article belongs to Dow Jones and may not be translated or reproduced without permission.