If a very minor recovery in the global economy pushes oil back toward $75, what will a robust expansion do? Crude moved to $73.79 on the New York Mercantile Exchange. The reason for the rise appears to be a belief that a pick-up in business spending and consumer activity will increase the demand for crude. There is also no evidence that production is up much or that OPEC and other producing nations are likely to increase global supply.
The price of oil is now nearly double its 2009 lows, and the recession has barely “ended” in regions like the US, UK, EU, and Japan.
Economists have been concerned for some time that an improvement in global business and consumer activity would set off a run up in oil. Even when the recovery was uncertain several months ago, crude moved above $60. Analysts now estimate that GDP in the US will be 3% in the third quarter and the National Association for Business Economics has declared that the recession has ended and that there is very little chance that the recovery will be “W-shaped”.
The global economy is now faced with the prospect that if GDP in the US and other developed nations begins to improve by 5% or 6% next year and China’s expansion goes back to nearly 10% that the demand for oil could move up very sharply in an extremely short period. Suppliers could be left flat-footed which could cause crude to quickly reclaim the $100 level.
One-hundred dollar a barrel oil is not a thing of the distant past. It will only take a slightly better than expected recovery for it to move back in that direction.
Douglas A. McIntyre
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