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Should you panic about oil prices?

Not yet. Middle East turmoil may increase the danger of rising oil prices triggering a double-dip recession. But while a short-lived oil price spike is quite possible, a sustained spike causing serious economic damage isn't likely. Still, the US should consider two approaches for insurance.

By Steve A. Yetiv / March 4, 2011

Norfolk, Va.

Middle East turmoil is raising the danger that rising oil prices could eventually damage the American and global economy or even trigger a double-dip recession. Cash-strapped consumers who pay more at the pump will have less money to buy shoes, computers, cars, wireless gadgets – you name it. Higher oil prices will feed inflation, which already worries economists. And stock market investors could flee markets, fearing that others will do the same in the face of an oil shock.

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But what is the likelihood of this scenario? A short-lived oil price spike is quite possible, but a sustained spike that can cause serious economic damage isn't likely. But regardless of the length or likelihood of a sharp rise in oil prices, now is the time for Americans to take steps to decrease their dependence on Middle East oil.

How Mideast turmoil affects oil prices. Six questions answered

Nomura Holdings Inc., the Tokyo-based bank, has said that if Libya and Algeria were to halt oil production totally, oil prices could peak above $220 a barrel. But the world’s spare capacity or idle oil capacity is closer to historic highs than lows.

Saudi Arabia holds roughly 3 million barrels and OPEC is estimated to have approximately two more million barrels. That can probably make up for Libya’s and Algeria’s export production. Bloomberg estimates that Libya produced 1.59 million and Algeria produced 1.25 million barrels per day last month (though a total cut off in both countries is not likely). Saudi Aramco CEO Khalid al-Falih told reporters recently that his company was prepared to make up for any Libyan shortfall.

The International Energy Agency (IEA) – made up of mainly oil-importing nations – also requires its members to hold emergency oil reserves equal to at least 90 days of its net oil imports from the previous year. IEA members hold around 1.6 billion barrels of oil, including over 700 million in America.


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