Oil Price Surge Manageable for US Economy, Says Goldman Sachs

The recent surge in oil prices, which has seen an increase of 30% since late June, is a “manageable headwind” for the US economy and consumers, according to Goldman Sachs. The bank’s analysts have stated that despite the rise in gasoline prices nationwide, it is unlikely to cause a significant impact on consumer spending or the country’s gross domestic product (GDP).

On Monday, the national average for gasoline sat at $3.85, just three cents short of its 2023 highs. However, Goldman Sachs’ chief economist Jan Hatzius wrote in a note published on Sunday that he anticipates consumption growth to slow during the fall and winter, but not decline due to higher oil prices.

Oil prices have steadily climbed since late June due to output cuts imposed by OPEC+, as well as unilateral supply curbs from Saudi Arabia and Russia. West Texas Intermediate and were up roughly $20 since June, standing just above $89 and $93 per barrel on Monday respectively.

Despite rising energy prices, Goldman Sachs’ analysts highlighted that the increase is small compared to periods in 2008 and the first half of 2022. They also noted that any potential GDP headwind would be offset by higher capital expenditures from the energy sector and lower electricity costs due to a pullback in coal and prices this year.

The Federal Reserve maintained interest rates at a 22-year high last week while leaving room for another rate hike later this year to bring inflation back down to 2%. Goldman Sachs’ analysts believe that the Fed is unlikely to tighten policy in response to higher oil prices at a time when core inflation and inflation expectations are falling.

Goldman Sachs has lowered its fourth quarter 2023 and first quarter 2024 GDP forecasts by 0.4 and 0.2 percentage points respectively, to +0.7% and +1.9%. The bank estimates that changes in energy prices will lower GDP growth by 0.3% annualized and consumption growth by 0.5% annualized over the next two quarters.

The recent rise in oil prices has led to concerns about a potential recession and reaccelerated inflation, which could prolong the Federal Reserve’s tight monetary policy stance. However, Goldman Sachs’ Spencer Hill provided three key reasons why the oil price surge is manageable: the increase is relatively small compared to previous periods; higher oil prices are offset by falling electricity prices; and the Federal Reserve is unlikely to hike interest rates due to higher oil prices.

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