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Rex Nutting
Feb. 25, 2011, 12:00 a.m. EST
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By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "” Economists, analysts and strategists disagree more than usual about how much damage higher oil prices will inflict on U.S. economic growth this year.
Some say it'll barely be a bump in the road, while others are setting their hair on fire about the looming disaster.
Oppenheimer analyst Fadel Gheit talks to News Hub about the outlook for energy prices with unrest growing across the Middle East.
So far, the level crude oil prices and the amount of oil being held off the market are not enough to unhinge the global economic recovery. But we are still in the early innings of the Great Arab Awakening, and we shouldn't presume to know what course it will take.
No one enjoys paying $3.25 a gallon or more for gasoline (unless you own an oil well), but so far, gas prices at these levels aren't forcing Americans to cut back too much on their spending on other things. It's a drag on the economy, but it's not killing us.
Plus, we've seen this before: Gas at $3 doesn't have quite the same sting as it did in 2005, when we first saw those prices at the pump. Once you've paid more than $4 for a gallon, $3.25 maybe doesn't seem like the end of the world.
Or maybe it does. Economist David Rosenberg of Gluskin Sheff said that "we are getting closer to the point where the surge in oil prices could tip the global economy back into recession." The deeply bearish Rosenberg said the trigger point is around $120 a barrel, according to a note he emailed to clients Thursday.
The price of crude oil is climbing fast.
Incidentally, the futures prices for Brent crude hit $119.79 a barrel on Thursday. Read our coverage of futures markets, including oil.
On the calmer side of the spectrum, we've got economist Sven Jari Stehn of Goldman Sachs, who wrote in a note that there's "only a modest hit to growth" so far. Even with oil expected to average about $120 a barrel late in 2012, Goldman economists expect robust GDP growth in the U.S. economy of around 3.4% this year and 3.8% next year.
The Goldman economist said a sustained 10% spike in oil prices could be expected to reduce GDP by about 0.2% over one year and 0.4% over two years, mostly by reducing consumer spending, and to lesser extent, business investment.
James Hamilton, economics professor at the University of California at San Diego, comes to a similar conclusion. On his Econbrowser blog, Hamilton concluded that a 20% increase in oil prices could be expected to shave about 0.5% from U.S. GDP. He thinks there's a tipping point at around $130 a barrel. Read Hamilton's post on Libya, oil prices and the economy.
The uncertainty among analysts is reflected in volatility in all of the financial markets. U.S. and global stock markets are down, and safe-haven investments are up. Investors are scrambling to protect their wealth now, or positioning themselves for the inevitable correction. Oil prices are responding not only to actual disruptions in supply, but also to potential shut-ins, according to traders.
As the antigovernment protests spread from Tunisia and Egypt to Bahrain and Libya, global oil prices have risen about 15% to $100 in U.S. markets and $120 for Brent crude traded in London. During the spike in the summer of 2008, by comparison, oil prices topped $145 a barrel briefly.
Libya is a significant oil producer, accounting for about 2% of global output. Because global demand is growing rapidly, shutting off all Libyan supply for a prolonged period could send prices sharply higher. Saudi Arabia has promised to make up for any lost supply, but hasn't increased its production yet. Some doubt that it could do so for an extended period, even if it wanted to.
Even if we lost all Libyan oil, it wouldn't compare with the biggest oil shocks of the postwar era. UC's Hamilton figures that the Suez Crisis in 1956 was the biggest oil shock, cutting 10% of global supply. The first Gulf War in 1990 reduced supply by an estimated 9%. The OPEC embargo and the Iranian Revolution in the 1970s and the Iran-Iraq War of 1980 each reduced supply by about 6% to 7%. Each of those supply disruptions was followed by a recession, either in America or in Europe. Read Hamilton's paper on historical oil shocks.
The Middle East now accounts for 29% of global supply "” including 12% from Saudi Arabia, nearly 9% from the Gulf states and about 5% from Iran, according to data from the U.S. Energy Information Agency. See more on global energy supplies from the EIA.
A 2% hit to supply probably isn't enough to tip the global economy into recession, especially with emerging markets growing with so much momentum. However, an extended 10% hit almost certainly would lead to recession.
Much depends on how long the supply disruptions last, and how widespread they become. The only thing that's certain is that the Arabs are no longer willing to quietly endure despotic rulers and their vastly unequal societies.
If the mainstream estimates are right, the supply reductions would have to get much worse before they'd threaten a global recession. But even at these levels, higher oil prices are hurting consumers, not only in the United States and Europe but especially in developing countries.
That's the dangerous dynamic to watch: Higher prices fueling popular unrest, which in turn disrupts supplies of not only oil but other commodities as well, leading to even more dissent. The kind of uncertainty we're living under now could be the new normal.
Rex Nutting is Washington bureau chief of MarketWatch.
It's about time CBS took a stand on the Charlie Sheen fiasco, writes Jon Friedman.
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