The media is surprisingly quiet about the "oil shock" that we are going through. One might almost call it "suppressed panic": I'm seeing the story in financial sections but it hasn't hit the front page yet. The price of oil keeps hitting record highs, and witThe media is surprisingly quiet about the "oil shock" that we are going through. One might almost call it "suppressed panic": I'm seeing the story in financial sections but it hasn't hit the front page yet. The price of oil keeps hitting record highs, and with supply barely exceeding demand, the price may continue to rise in the months to come.
The question is how much. The consensus seems to be that if we hit the $60-70 level and stay there for a few months, we're definitely looking at another recession. But what damage could a $50-60 price do? Stephen Roach of Morgan Stanley was concerned, saying in August that
With oil prices now in the high $40s (WTI basis), there is good reason to treat this development as yet another in a long string of energy shocks. The impact of such disruptions depends very much on context -- namely, the vulnerability, or lack thereof, in the underlying economy. When a weak economy is hit by any type of a shock, recession normally results. Conversely, a strong economy is better insulated to withstand such a blow. Most of the oil shocks of the past fall into the former category -- hitting economies when they are vulnerable. Unfortunately, the Oil Shock of 2004 fits that script to a tee. [...]
At the current level of around $47, oil prices are 62% above the $29 average that has prevailed since early 2000. That takes the "real" oil price (i.e., WTI quotes deflated by the headline CPI) back to levels last seen in the late 1980s; in fact, other than the brief spike in late 1990, the current increase represents the sharpest run-up in the real oil price since the late 1970s. I have maintained for some time that the "true" shock probably comes with $50 oil (see my May 10 dispatch, "Global Wildcards"). That would represent in excess of a 70% surge above the post-2000 average -- enough of a spike, in my view, to put it in the ballpark with full-blown oil shocks of the past.
"The economy is near its tipping point," Stephen S. Roach, chief economist for Morgan Stanley, said yesterday. He said the nation would likely fall back into recession if oil prices hover near $50 a barrel for three to six months.
"This is an oil shock, absolutely," Roach said, noting that yesterday's closing price was 68 percent higher than the roughly $29 per barrel average that had prevailed since early 2000. "The oil price is high enough to make a real difference to a vulnerable U.S and global economy."
I wonder if W's economic legacy will be a W-shaped recovery.
Update, Nov. 1, 2004: Oil Down $2, Speculators Bet on Kerry Win - LONDON (Reuters) - Oil prices fell heavily on Monday, taking U.S. crude below $50 on speculation that a U.S. election win for Senator John Kerry could ease the geopolitical friction that helped fuel this year's record-breaking rally.
Update, April 8, 2005: "The economists have changed their minds," says the WSJ. The economists who were saying last August that $50-60 oil would cause a recession have bumped their estimate up to $80-90. It's quite possible they were too pessimistic last year (and that I was foolish to believe them). But this writer wonders if they shouldn't have stuck to their guns. Oil peaked recently in the high-$50s, but has declined all this week, to $53.