Oil Shock 2?
With prices at $120 a barrel, Americans are facing an oil adjustment.
Two years ago a leading economist published a study provocatively titled: "What would $120 oil mean for the global economy?" Answer: a global recession, if the price stayed there for a year.Skip to next paragraph
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Now the future has arrived, with the United States and other nations getting a double whammy from both the mortgage crisis and oil futures hovering at $120 per barrel. If oil prices stay stratospheric, the cost of fueling cars and planes could slash US economic growth up to 2.3 percent and global growth by 3.6 percent, says Robert Wescott, former chief economist of the president's council of economic advisers and author of the $120 oil report.
While many energy-security experts worry about a terrorist attack that suddenly crimps global oil supplies and hammers the US economy, Dr. Wescott and other experts say a terror attack is hardly the only, or even the worst, oil threat the nation now faces. "What we are seeing today is more of a slow-motion, rolling oil crisis rather than a sharp shock, yet ultimately we end up with the same sorts of impacts [as a terror attack]," says Wescott, now president of Keybridge Research, a Washington economic-consulting firm.
Unlike the 1970s, when an oil embargo left Americans waiting in long lines at gasoline stations and paying higher prices, today's oil crisis has been stealthy. Its economic impact has been masked by consumers tapping credit cards and home equity to cover the rising cost of energy and some consumer goods.
"We're having a replay of the 1970s without the Arab oil embargo part, so it's been hard for many people to see," says Amy Myers Jaffe, an energy scholar at the Baker Institute at Rice University in Houston.
Even with US airlines cutting flights and SUV sales now tanking, the effects of expensive oil on the American family could be stark, Wescott's report says.
In 2003, with oil approaching $40 per barrel, the average US family spent about $1,900 (4.8 percent of its income) on natural gas, heating oil, and gasoline. But today at the $120 per barrel level, a family will spend about $6,000 a year or about 15 percent of total annual income, Wescott's report predicts.
Compared with the oil crises of the 1970s, the US paradoxically is in a bit better, yet also worse, position. The good news is the US economy is less energy intensive – using only about half the energy it did in the 1980s to produce a dollar of economic growth. That should make it more resilient.
But the bad news is that imported oil has risen to about 12 million barrels a day, about 60 percent of the 21 million barrels the US consumes daily. That financial drain at $120 per barrel is jamming the brakes on the US economy and inflating the trade deficit, economists agree. "The question now isn't whether we're going into recession, it's whether there will be a soft landing ... or we have a hard landing," Ms. Jaffe says.
Nariman Behravesh, chief economist at Global Insight, Lexington, Mass., has done economic projections with oil at even higher prices. While oil at $120 a barrel "makes a mild recession a little deeper," the results of oil at $150 would be much worse with the nation "looking at a fairly serious recession."