Analysis: The impact of war-driven oil price spikes will linger for months

Caption

Closeup of woman pumping gasoline fuel in car at gas station.

Credit: Adobe Stock Image

TRANSCRIPT:

Peter Biello: President Trump's war with Iran has prompted a spike in oil prices, which reached nearly $120 a barrel earlier this week. More expensive oil means the cost of gasoline and everything gasoline is used to transport will rise. For more on the economic impact to Georgians, let's turn to Thomas Smith. He's an economist at the Goizueta Business School at Emory University. Welcome to the program. 

Thomas Smith: Thank you for having me, man. I appreciate it. 

Peter Biello: So oil prices topped 100 bucks a barrel earlier this week. Some forecasters warn of $4 a gallon gas if prices stay elevated. When gas becomes more expensive, how might that impact the cost of other things Georgians rely on? 

Thomas Smith: So I just did an analysis last night just to see how everything works. And so I mapped out the cost of West Texas Intermediate Crude. So, and I looked at the year-over-year changes of that and mapped it to the year-over-year changes in the CPI, which is consumer price index, and the year-over-year changes in the PPI, the producer price index. And there's a little bit of a lag. And so when you have oil price shocks — so the price of oil goes up and you see some inflationary trends — you tend to see a jump in the producer price index the following month, which then actually corresponds to the consumer price index for that month and the next month. So you see this cascading effect where oil price shocks today cause producer price increases in 28 days, which then lead to almost immediate increases in consumer prices and then some inflation going forward. So anything that's made with energy, which is just about everything, will cascade into higher consumer prices down the road. 

Peter Biello: And is all that contingent upon prices, oil prices, staying where they are? Or, if it drops like later this week, back to where it was a few weeks ago, will prices stable out faster than what you just described? 

Thomas Smith: If oil prices go down, that doesn't change the fact that producer prices went up. So we still might see an increase in the cost of doing business, which might translate into the cost of goods and services for consumers. So even if oil prices were to go back down today, it doesn't mean that you're going to see a decrease in even the price at the gas pump today. You might see that decrease in price of the gas pump two weeks from now, right? So, I mean, there's this cascading effect, but you see the price increases almost immediately. You don't see the price decreases immediately. 

Peter Biello: Are there sectors of the Georgia economy that would be particularly hard hit? Maybe farming or travel or something else? 

Thomas Smith: Both those areas are very susceptible to price changes. For farming, you've got fuel for your tractors, other types of implements. Also, fertilizer costs are actually increasing quite substantially as a result of this current conflict. So farmers are going to see a double whammy in terms of price increases, both for fuel diesel and for fertilizer. Additionally, as you just mentioned, Atlanta is the home of Delta. So I mean, jet fuel, right, is very expensive. And when you have these increases, the expense just increases astronomically. So you're going to see an increase in the price of tickets and so that travel — it corresponds to spring break around here for many colleges, but it's going to translate into other business travel almost immediately. So those areas are very susceptible. People will see, if this thing persists — if this conflict persists — people will see an increase in the cost for things that they're doing on a daily basis. So you're ordering food delivery through any number of apps. The travel cost or the transportation cost might go from $1.99 to $2.99. You might not think that that's a big deal, but that's like a 50% increase in the cost of those surcharges. That's a lot if you consider maybe how often you might order in. 

Peter Biello: Thomas Smith is an economist at the Goizueta Business School at Emory University. Thank you so much for speaking with me.

Thomas Smith: Thank you so much for your program. I really appreciate it.