What If Oil Was $120 Again?

As much of the world moves into or toward recession, Brent crude has fallen to less than $100 a barrel from $120 four months ago. It is only a coincidence, but it begs the question of what would happen if oil prices were not down or what could happen if they rise again.

The price of Brent is below $99, driven down according to most opinions by high OPEC production, slack global demand because of economic trouble, as well as the near disappearance of the threat of a was with Iran. Some of these factors could change, particularly because Iran remains unstable and OPEC’s plans opaque.

The International Energy Agency recently reported that high oil prices shift economic strength from oil importers to exporters. That is obvious, but it confirms the prediction that nations in the Middle East and Russia, Venezuela and Canada would reap benefits, while large economies including China, the United States, Germany, India and Japan would suffer. So would most EU nations, aside from Germany, which are not energy independent. The International Monetary Fund has calculated that a $50 increase in oil prices, from a level of $107 in 2011, could shave global gross domestic product by 0.5% to 1% in 2012. The effects in 2013 and 2014 likely would be similar.

Much of Europe is already in recession, with Spain’s GDP down 0.4% in the first quarter of 2012 compared to the final quarter of 2011. Italy’s GDP fell 0.8% by the same measurement, and UK GDP was off 0.2%. The U.S economy is stronger, but first-quarter GDP was recently revised downward to 1.9%. India’s GDP growth faltered a great deal in the first quarter to 5.2%. A multitude of data shows China’s economy also has slowed, in particular based on data on its purchasing managers index.

Some experts believe that oil price increases cannot be tied to GDP activity with any precision. That may be so, but it would be nonsense to think the effects do not exist.

Oil prices rose rapidly eight months ago. Some of the same threats still exist. Oil prices remain a huge risk that could increase the chance of a swift, sharp global recession.

Douglas A. McIntyre