The ‘green shoots’ of economic recovery could be nipped in the bud if oil prices, driven by rising demand and insufficient investment, approach last year’s highs, according to a new report from Douglas- Westwood.
In Oil: what price can America afford?, author Steven Kopits, who heads Douglas- Westwood’s New York City office, notes that ‘oil played a central role’ in each of the six recessions the US has endured over the past four decades, including those that followed the Arab oil embargo of 1973 and the 1979 Iranian revolution. Historically, the US economy grew well when oil consumption expenditures remained at 2% of GDP or less, Kopits noted, and suffered a recession whenever expenditures exceeded 4% of GDP. Price volatility also appears to play a role: ‘Whenever oil prices have increased by more than 50% year-on-year,’ he said, recessions have followed close behind – including the tech bust of 2001, which is rarely linked to the price of oil.
Those statistics could help lawmakers predict the likely outcomes of different energy policy strategies as Washington weighs the environmental and economic effects of measures aimed at reducing CO2 emissions, the report continued.
As the world digs out of the current recession, concerns are also emerging that renewed demand could mean renewed volatility. Saudi oil minister al-Naimi has warned that underinvestment in oil capacity could produce price spikes of $150/bbl or more. And the investment bank Macquarie recently predicted that spare oil capacity could evaporate by 2013, causing a repeat of the oil price rally of 2Q 2008. If the historic model holds up, that could bode ill for the US: ‘Should oil return’ to $150/bbl, said Kopits, ‘the statistics are not ambiguous. Expect a recession, and a severe one at that.’ OE
Issue: August 2009
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