U.S. Oil Prices Hit $70 a Barrel for First Time Since ’14

As a larger chunk of workers’ paychecks goes to fuel, less disposable income is left to be spent elsewhere, a potential problem for an economy heavily reliant on consumer spending. Consumer spending slowed sharply in the first quarter, when it inched up at a 1.1 percent annual clip.

Much of that had to do with a slowdown in auto sales after a surge in car-buying late last year to replace vehicles damaged by Hurricane Harvey.

Higher fuel prices could also weigh on auto sales. Low gasoline prices have shifted car purchases heavily toward pickup trucks and sport-utility vehicles, which tend to be less fuel-efficient than passenger vehicles.

U.S. Oil Prices Hit $70 a Barrel for First Time Since ’14
U.S. Oil Prices Hit $70 a Barrel for First Time Since ’14

Automakers have adjusted their offerings to match the market, with Ford recently announcing it was phasing out the Focus, the Fusion and other sedans from its North American business. Ford’s decision suggests that some carmakers think demand for S.U.V.s and pickups — which are far more profitable — is unlikely to be shifted by any short-term move in gas prices.

“I think you have to get $4 to $5 per gallon before you start having a psychological impact,” said Joseph Amaturo, who covers the automotive industry for Buckingham Research.

For their part, oil companies responded to the price crash that began in 2014 by cutting exploration and other spending and negotiating sharply lower rates from drillers and other contractors, who do much of the work in the oil industry.

As a result, oil and gas projects that are going forward tend to have sharply lower costs than those begun in the $100-a-barrel era. Jessica Uhl, Shell’s chief financial officer, said recently that a United States oil field in the Gulf of Mexico that Shell was developing would break even at less than $35 a barrel thanks to a 70 percent reduction in its original projected capital costs. “By applying industry-standard designs, we simplified the scope,” she said.

Lower costs, combined with higher oil prices, are likely to raise profits as long as these conditions hold. Of course, cost inflation may return to the industry, and the cash rolling in may eventually loosen spending discipline, as it did a few years ago.

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