High oil prices are “manageable”

The Federal Reserve’s decision to keep interest rates at their highest in 22 years, announced last week, has led to significant reactions in the market, including some of the highest treasury yields seen in over a decade and a half. The move hints at a continuation of elevated rates for the foreseeable future, causing concerns for the upcoming fiscal year.

In addition to these developments, oil prices have been rising since late June due to output cuts implemented by OPEC+ and unilateral supply restrictions from Saudi Arabia and Russia. This surge has led to an increase in gasoline prices, directly impacting American consumers. The national average for gasoline has reached $3.85, just shy of its 2023 peak.

Despite these challenges, Goldman Sachs analysts have described the oil price rise as a manageable issue. They do not expect it to significantly affect American consumers or the country’s gross domestic product (GDP). Goldman Sachs’ chief economist Jan Hatzius expressed optimism in a recent investor note about consumption growth decelerating in fall and winter but does not foresee a decline in consumer spending or GDP due to higher oil prices.

Hatzius and his team argue that the current oil price hike is relatively small compared to those experienced in 2008 and the first half of 2022. They also pointed out that any negative impact on GDP could be partially offset by increased capital expenditure from the energy sector and reduced electricity costs due to a pullback in coal and prices this year.

The analysts suggested that the Federal Reserve is unlikely to tighten policy in response to these oil price increases as core inflation and inflation expectations are currently decreasing. Hatzius estimates that changes in energy prices will reduce GDP growth by 0.3% annualized and consumption growth by 0.5% annualized over the next two quarters.

In light of these developments, Goldman Sachs analysts have revised their GDP forecasts for the fourth quarter of 2023 and the first quarter of 2024 downward by 0.4 and 0.2 percentage points, respectively, to +0.7% and +1.9%.

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