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Oil is key to Minnesota's economic condition

Minnesota State Economist Tom Stinson changes posters during Monday's report on the state budget. Don Davis / State Capitol Bureau

ST. PAUL - Oil makes predicting the economic future a slippery proposition.

A December federal tax deal helped the Minnesota economy do better than expected, but now the prospects of higher oil costs could hurt the country's economy.

Minnesota State Economist Tom Stinson said a budget report released Monday counts on oil selling for $90 to $95 a barrel. On Monday, it hovered around $100.

Stinson said it wouldn't take much of an oil-price increase to counteract the help that came from federal law changes.

The economist called the federal changes a "stealth stimulus package."

Many Americans are paying lower income taxes, Stinson said, while others are receiving unemployment benefits longer than under earlier laws. Both December decisions helped the economy.

Overall, the Minnesota economy has remained fairly stable since the last economic report in November, said Stinson, who expects moderate economic growth in the next two years.

But some things have changed since the November report, which contained many questions about the economy's future.

"Some of those uncertainties are even more volatile than what we saw last November," said Commissioner Jim Showalter of Minnesota Management and Budget.

There is some good news. In November, the state's economic adviser, Global Insight, predicted a 2.3 percent growth but now it suggests the economy could grow at 3.2 percent.

Part of the improvement comes from a lower federal capital gains tax, which influences investors to spend money that otherwise would have gone to Washington, Stinson said. That helped produce more revenue for Minnesota, he said, but there is no way to predict whether such activity will continue.

Much of the fear is based on geopolitical factors, such as the upheaval in many oil-producing Middle East countries, the economist said. The actions "could certainly cause the economy to do less well than expected."

Stinson said Global Insight made its national economic forecast before Middle East political upheavals began, so its expectation of sub-$100 oil may be too optimistic.

Each $10-a-barrel oil price increase raises the price of gas at the pump by 25 cents, he said. It ­wouldn't take much to produce a massive hit to the economy, Stinson said.

Don Davis works for Forum Communications Co. He can be reached at (651) 290-0707