US interest rate hike has greater impact on world energy market

Source:Xinhua Published: 2017/12/15 14:59:12

The US Federal Reserve (Fed) on Wednesday raised the benchmark interest rate by 25 basis points, as it raised the forecast for the country's economic growth in 2018. Local analysts said the move has little impact on the domestic energy industry, but it makes the US dollar more competitive in the international energy market.

David P. Tuttle, a research fellow in the Energy Institute at University of Texas at Austin, told Xinhua on Thursday that the rise in interest rates can strengthen the dollar in the short term, making US assets more attractive to foreign investment and making the dollar "more competitive in international energy markets."

"If interest rates are changing as they did during the (Ronald) Reagan administration, then we might see a more dramatic effect. However, this is not the current situation," he said.

"The price of oil is far more influential than interest rates," he said, adding the price of oil will determine production activities substantially more than the interest rates.

In Texas the main drivers of energy costs are natural gas prices and the installations of wind and solar power, he said.

"Our grid energy is mostly supplied by wind, coal and natural gas, which are domestic operations and will not see a great impact from a stronger dollar," he added.

Jim Krane, a Wallace S. Wilson fellow for Energy Studies at Rice University's Baker Institute in Houston, Texas, agreed with Tuttle.

"The demand for energy is described as inelastic," which means the energy industry is not hyper responsive to changes in prices or interest rates, Krane said.

Krane noted that this also means the consumer might feel a small effect in the rising interest rates related to car buying and gas consumption.

When interest rates rise, however, it becomes harder for companies and consumers to borrow, Krane said. Some of the smaller shale firms are more dependent on investor funding and "they might see an effect on operations," he said.

In a statement, the Fed said the labor market has continued to strengthen and economic activity "has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further."

With the interest rate hikes comes the assumption that the US economy is now stronger, which might lead to a rise in consumer spending.

The 7-2 vote for the rate move on Wednesday, the Fed's third this year, raised the benchmark lending rate by a quarter percentage point to a target range of 1.25 percent to 1.5 percent.

In another move that could tighten monetary conditions, the Fed confirmed that it would step up the monthly pace of shrinking its balance sheet.

Posted in: ECONOMY

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