3/1/2011 11:19 AM ET|
Will $200 oil kill the economy?
Unrest in key oil-producing nations opens the door to price spikes that could push gas to $7 a gallon and spin the world back into recession. Here's how we'd get there, and how to protect your portfolio.
Are your pocketbook and portfolio ready for $200-a-barrel oil?
This kind of dramatic price spike may seem less likely now than a few days ago, with oil markets calming down a bit and the price slipping below $100. But given the instability and unrest rolling through the Middle East and North Africa, it's a definitely a viable scenario.
For the moment, most oil sector analysts have gone off high alert because of a Saudi Arabian pledge to increase production to make up for any shortfalls sparked by unrest. But that ignores a key angle in all this: There's simply not enough spare capacity to make up for the production losses we'd see if the rolling crises in the region hit just two or three major producers at once.
This could easily happen, given the heightened potential for instability in four significant producers: Iran, Iraq, Kuwait and Algeria. Meanwhile, few analysts are even talking about Nigeria, but they should be. April elections there could bring attacks on the oil production infrastructure, just as happened in the previous two elections.
In a moment, I'll walk you through the details of how easily we could get to $200 oil, which would push gas to $6 or $7 a gallon at the pump. First, let's consider what a disaster $200 oil would be for our fragile economy.
Nowhere to hide
To sum up, it wouldn't be pretty. A sustained hike in oil prices to around $200 would definitely derail the economic rebound.
Here's the simple math: Because every $10 rise in oil prices reduces annual U.S. gross domestic product growth by 0.2%, a $100 increase in oil would knock down growth by at least two percentage points, says Nigel Gault, the chief U.S. economist of IHS Global Insight. With the economy growing at just 2.8%, that would put us back near recession. He says the effects of $200 oil would probably be bigger, since we would be in "unknown territory" with energy prices that high. Gault is not alone in this view. "In all likelihood, we will be back in recession if we go to $150 and stay there for a month or two," says Mark Zandi, the chief economist at Moody's Analytics.
Here's another problem: A big spike in oil prices would bring more inflation at a time when the Federal Reserve doesn't have a whole lot of leeway to combat inflation by raising interest rates.
Prices at the pump would shoot up to around $6 a gallon, since each $10 increase in oil prices translates into a 25-cent increase in gasoline prices. The national average is around $3.30 a gallon now. A crisis premium on top of that -- say, worry that another oil-producing nation experiences a revolt -- could take gas prices to $7 a gallon.
That's not quite the $10 a gallon you might have heard talk-radio hosts fretting about last week, but it would have huge economic implications. Prices of just about all goods would go up, because shipping and manufacturing would cost more. And of course, oil touches almost every industry we have, from plastics production to agriculture.
In the stock market, there would be almost nowhere to hide. Automakers, truckers, airlines, manufacturers and travel-related industries such as hotels and restaurants would get hit hardest. Most retailers, even high-end stores, would suffer, too. Consumers with moderate incomes would see their budgets hurt by higher energy costs, of course. But the stock market crash would make high-income consumers close their wallets, because they have so much of their wealth in stocks. About the only kind of stores that might benefit would be low-priced retailers like Wal-Mart Stores (WMT, news) as consumers turn to them for discounts, trading down from more expensive retailers.
Now, I'm not suggesting you sell all your stocks and empty your 401k because of the possibility of $200-a-barrel oil. Even if it reaches $200, oil can't stay that expensive forever. Energy-rich countries need the income from oil, so however the uprisings come out, they would figure out a way to get production back on line. And at worst, $200 oil would kill growth to such a degree that demand would plummet, driving oil prices back down.
But it does make sense to get more exposure to energy stocks right now, particularly those of the oil-service sector companies that provide the equipment and know-how for finding and producing energy. These companies, like Schlumberger (SLB, news) and Transocean (RIG, news), will do well in a price spike, and they're likely to do well over the next several years anyway. Natural declines in production at existing sites means energy companies will have to keep finding and develop new supplies.
The $200 oil scenario
To understand how we could get to $200 oil in a hurry, you need to start with two key facts that provide a big-picture perspective.
- World oil production is about 88 million barrels a day, with about 5 million barrels a day worth of spare capacity.
- During the Gulf War in the early 1990s, it took only a 2.1-million-barrel-a-day decline in spare capacity for oil prices to skyrocket 130%, the equivalent of oil reaching $220 a barrel today, points out oil sector analyst Michael Lo of Nomura.
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I see some one posted that Europe has had $7.00 a gallon gas for years and that Americans shouldn't complain. Most European have very dense population centers and public transit is efficient there. Most of Europe has nuclear power plants that generate electricity for the fraction of the cost here in the U.S. and its subsidized by the government as is many of the utilities. Europe also has in many countries socialized medicine, government backed retirement and other social programs which is why countries like PORTUGAL, ITALY, IRELAND, GREECE and SPAIN are going BROKE!!!
We have enough oil reserves, shale, coal and nuclear plant space to get completely off foreign oil and be self sufficient for 50 years. This would be more than enough time to develope alternative fuels. The problem lies with the EPA, our elected officials, the SEC and the Federal Reserve.
The EPA is being used by the President to prevent drilling in the US ( remember Obama said on national television in 2009 that oil may necessarly have to go to $5.00 a gallon). Our elected officials are lining their pockets with profits while the SEC turns a blind eye to commodity trading speculation. The Federal Reserve under Ben Bernanke ( shadow stock trader supreme) is using stimulus and Permanent Open Market Operations to keep the Stock market up which in turn is creating a bubble in commodities through inflation.
All is not lost however if Americans will fight back with their pocketbooks, KEEP THEM CLOSED! Send a message to the banks by pulling out your money and start using credit unions, pay off and cut up your credit cards, cut back on unecessary gasoline use by limiting trips and by only basics. Don't take a vacation this year, cook at home, buy store brands, rent a movie don't go to theaters, cut back on cable, pay off debt and put as much in savings as possible. Obviously our government wants another recession, lets give them what they asked for.
The consumer in this country gets gouged! Did you know that anyone who pumps gas right now is being taken advantage of because THE CRUDE OIL THAT HAS JUST SOLD FOR A HIGHER PRICE HAS NOT EVEN BEEN REFINED INTO GAS YET! WHY IS THE CURRENT GAS AT THE PUMPS HIGHER? IT WAS REFINED AT THE LOWER CRUDE OIL PRICE. AMERICANS ARE BEING GOUGED AT THE PUMPS RIGHT NOW AND OUR GOV'T. LETS THEM GET AWAY WITH IT! IT'S ALL MEDIA HOGWASH TO BRAINWASH AMERICANS TO PAY THE HIGHER PRICE!
This is INSANE!!!
We go to war and save a country (Kuwait), save Iran out with there problem. Loose alot of good people in the process plus more! Gas prices should be way down.
Too many fat cats getting fatter at the expence of the little guy.
When does it end!!!!!!!!
$7 a gallon gas won't tip us into recession.....$5 a gallon gas will tip us into our 2nd great depression.
While the direct expense of fuel *might* be ok for the cummuter, the ripple effect of inflation will accelerate the closures and downsizing already happening in the commercial business market.
Anyone visited parts of the former USSR? The golden rule and corruption are the name of the game there. There is no recreational activities like golf, boating, camping, etc etc, for 99% of the people. No one maintains the parks and public areas. You work 2 jobs and walk to work from a 300sq/ft apartment. Greedy corporations can sell your countries fuel, food, and commodities on the global market for more so they do...nevermind that you only take home $300 a month. Gas is still $4 a gallon, meat still $3 a lb.
And the big problem? No one does anything, they just keep bending over further and further.
This could be the US, and this could be just the beginning.....
The argument has been not to drill in the United States because it would be 10 years before we would see any oil. Well that argument has been going on for over 20 years about 10 years beyond the date the nay sayers were using to stop oil drilling in our country.
If we had started 20 years ago, 10 years ago or even 5 years ago we would see the oil flowing already.
I say no matter what begin the drilling now. When the contracts are let out it must be stipulated that any oil drilled within the United States to include off shore drilling must be sold in the U.S. market not shipped oversees where we will have to pay a higher price for it.
A picture of someone standing at a gas pump is used in this article how about a bunch of people waiting to get on board an airplane.
I believe that it would. In MS, gas seems to be going up about 4 to 8 cents a gallon. If our government thinks the recession is over, it will be in full swing if gas reaches $4 per gallon, which is not too far off. There have been rumors that gas will get above $5 per gallon by end of the summer at the current rate of increase. At this point, I would bet that if gas prices continue to increase, unemployment will shoot up even faster because businesses will have to have massive lay-offs to help deal with the cost of energy.
As far as trying to get to oil under the US, the activists will do all they can to prevent drilling operations from happening in the US.
This is just an opinion.
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