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Oil prices need to go this high to push the global economy into recession - MARKETS WATCH

SEPTEMBER 18, 2019

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Worried about oil prices after the weekend’s raids on Saudi Arabia?

You may want to wait until prices rise more before really getting scared about the risks to your job, your budget, or the economy.

A lot more.

Since 1980, personal incomes have risen eight times as much as oil.

“$110 a barrel — that would probably be enough to put the global economy in recession,” says Steven Kopits, managing director of energy consulting firm Princeton Energy Advisors.

Or, to be on the safe side, let’s say the point to get really worried is when prices start surging toward $100.

Despite the panicked headlines around the world, Monday’s 13% spike in fuel prices left West Texas Intermediate crude oil CL.1, -1.84%  , the U.S. benchmark, around $62 a barrel.

Some context: In April, the price was $66.

Last October, it was north of $75.

Adjusting for inflation, oil prices after the Saudi raids are about half what they were in 1980, early 2008 and 2014.

Measured in 2019 dollars, oil peaked at $158 a barrel in 2008 and was north of $100 as recently as 2014.

Since 1980, personal incomes have risen eight times as much as oil. Energy expenses of all kinds are near their lowest levels, as a share of disposable income, since the World War II.

‘Oil is like oxygen to the economy.’—Steven Kopits, chief executive of energy consulting firm Princeton Energy Advisors

 

Among the reasons, say economists: Better fuel efficiency across the board, and the shift of the economy from manufacturing, which is energy-intensive, to services.

The latest move is big for a single day. And it’s been cushioned by President Trump’s move to release supplies from the U.S. Strategic Petroleum Reserve, which was created for just this purpose.

But on a longer-term view, so far the rise in prices is minimal.

That’s not to say it’s unimportant.

“Oil is like oxygen to the economy,” says Steven Kopits, chief executive of energy consulting firm Princeton Energy Advisors. “We almost always have an oil price spike preceding a recession. Oil is our monopoly transportation fuel.”

Kopits noted that oil prices surged before the recession of 1958, the energy crisis recessions of the 1970s and early 1980s, and the 1990-1 recession. He might have added that crude oil prices doubled in the year leading up to the financial crash of 2008.

And even if the U.S. economy is less exposed to oil price fluctuations than it once was, that’s not the same for all other countries. China is now the world’s biggest oil importer. (One reason America is more energy efficient: We’ve moved a lot of our manufacturing to Asia).

Folk memories run deep, especially of the crises of the 1974 and 1979-80, when disruptions of the energy supplies from the Middle East plunged America and the western economies into economic and political crises. So it’s understandable that people are nervous about threats to oil supplies.

As for the effect on the U.S. economy: It’s now a two-way street, says Gregory Daco at Oxford Economics. The U.S. is no longer a major net importer of oil. We’re actually on the cusp of becoming an exporter.

So while a big jump in oil prices would hurt the consumer, it would also boost cash flow and business investment in the shale oil territories like Oklahoma and North Dakota, he said. “For the broad economy, there is increased evidence that oil prices affect the economy in much more nuanced ways than they did 10 or 20 years ago,” he says.

And it would be great for all those “green economy” companies that want to cut our carbon footprints. The more we have to pay for gasoline, the more attractive their products and services will look in comparison. Tesla TSLA, +0.07%, anyone?

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