$100-per-barrel oil raises recession fears
Monday, 5 November 2007
The price of oil is approaching $100 a barrel, an important psychological barrier for Americans already hard hit by higher energy prices and the threat of a housing-induced economic slowdown according to Internet.
Even though headlines will scream, markets will get nervous, and politicians will blame each other, the real economic impact of a triple-digit price for petroleum is uncertain. It depends on whether the price is temporary or it continues to surge upward, analysts said.
But $100-a-barrel oil and possible higher gasoline prices would come at a bad time for the U.S. economy. As an economic force, analysts said, higher oil prices alone would not be enough to cause severe economic damage.
Yet on top of other major economic concerns -- a brutal housing correction, troubled financial markets and hard-hit banks -- they could be the catalyst for a possible recession.
To energy experts such as Mary Novak of Global Insight, a Boston-based economic consulting firm, the price of oil could hit $100 a barrel before long but is likely to fall back after that. She said the high price of oil over much of the past year has been driven by speculators and by geopolitical concerns, such as U.S. clashes with Iran, and not as much by market conditions. If she is right, any damage would be minimal.
But to Phil Verleger, an energy economist in Aspen, Colo., the price of oil could stay high through much of the winter and then a hot summer in 2008 could cause gasoline prices to rise as high as $4.50 a gallon in most places across the country. That scenario would not be good for the economy and for incumbent politicians in an election year.
Less dependence on oil
So far, the surging price of oil -- at a record $95.93 a barrel on Friday -- has affected the economy only marginally. That's because the U.S. and the rest of the world are less dependent on oil. "We basically use oil for transportation, and a small amount is used in other sectors," said Novak, Global Insight's managing director of energy services. "While significant, it is not a big drain on our economy."
But clearly it could be a big drain if it causes the price of gasoline to surge. Joel Naroff, an economic consultant in Holland, Pa., said the worst-case scenario is if the price of oil stayed in the $90-to-$100-a-barrel range, causing gasoline prices to rise at the start of next year's driving season. As summer demand picked up, he said, gasoline prices could head higher.
"Prices of all energy sources would really skyrocket," Naroff said. "That would cause a slowdown in consumer spending at the same time prices are going up. If consumers are looking at $4 a gallon gasoline, they wouldn't have a lot left in their pockets to spend."
That is also Verleger's biggest worry. The U.S. may escape such a surge in the price of oil and gasoline, he said, but he added that "the conditions for another doubling of the price of oil are in place."
He cited strong economic growth in Asia, a lack of investment in oil production and "a lack of real serious efforts to reduce consumption."
"While it might be a big psychological thing for oil to hit $100, the first concern is where the top is," Naroff said. "The second concern is how long it stays there."
Even though headlines will scream, markets will get nervous, and politicians will blame each other, the real economic impact of a triple-digit price for petroleum is uncertain. It depends on whether the price is temporary or it continues to surge upward, analysts said.
But $100-a-barrel oil and possible higher gasoline prices would come at a bad time for the U.S. economy. As an economic force, analysts said, higher oil prices alone would not be enough to cause severe economic damage.
Yet on top of other major economic concerns -- a brutal housing correction, troubled financial markets and hard-hit banks -- they could be the catalyst for a possible recession.
To energy experts such as Mary Novak of Global Insight, a Boston-based economic consulting firm, the price of oil could hit $100 a barrel before long but is likely to fall back after that. She said the high price of oil over much of the past year has been driven by speculators and by geopolitical concerns, such as U.S. clashes with Iran, and not as much by market conditions. If she is right, any damage would be minimal.
But to Phil Verleger, an energy economist in Aspen, Colo., the price of oil could stay high through much of the winter and then a hot summer in 2008 could cause gasoline prices to rise as high as $4.50 a gallon in most places across the country. That scenario would not be good for the economy and for incumbent politicians in an election year.
Less dependence on oil
So far, the surging price of oil -- at a record $95.93 a barrel on Friday -- has affected the economy only marginally. That's because the U.S. and the rest of the world are less dependent on oil. "We basically use oil for transportation, and a small amount is used in other sectors," said Novak, Global Insight's managing director of energy services. "While significant, it is not a big drain on our economy."
But clearly it could be a big drain if it causes the price of gasoline to surge. Joel Naroff, an economic consultant in Holland, Pa., said the worst-case scenario is if the price of oil stayed in the $90-to-$100-a-barrel range, causing gasoline prices to rise at the start of next year's driving season. As summer demand picked up, he said, gasoline prices could head higher.
"Prices of all energy sources would really skyrocket," Naroff said. "That would cause a slowdown in consumer spending at the same time prices are going up. If consumers are looking at $4 a gallon gasoline, they wouldn't have a lot left in their pockets to spend."
That is also Verleger's biggest worry. The U.S. may escape such a surge in the price of oil and gasoline, he said, but he added that "the conditions for another doubling of the price of oil are in place."
He cited strong economic growth in Asia, a lack of investment in oil production and "a lack of real serious efforts to reduce consumption."
"While it might be a big psychological thing for oil to hit $100, the first concern is where the top is," Naroff said. "The second concern is how long it stays there."