Can high oil prices cause a global recession that will eventually pound the shores of the United States economy?
Concern about this possibility is real enough that it's prompted President Clinton to pressure the OPEC oil cartel - once again - to increase production until oil prices drop by nearly one-third.
It's a point he made on his recent trip to Nigeria, an OPEC member, and one he plans to deliver to other cartel members in coming weeks.
But some economists see Mr. Clinton's pressure play as motivated at least as much by domestic politics as by concern about recession elsewhere in the world. "Some issues get politicized in an election year," and the price of oil is one of them, says James Osten, chief energy economist at Standard & Poor's DRI.
With America's economy humming along, seemingly oblivious to the higher oil prices of recent months, the possibility that a recession in other countries might trickle down to the US doesn't seem to alarm many economists. The real impetus for Clinton's action, some suggest, is angry consumers (i.e., voters) in regions that have been hit by high gasoline prices - especially the political battleground states of the Midwest. Residents of the Northeast, too, face potentially high heating prices this winter.
But Mr. Osten says that today's oil prices - about $30 a barrel - are nowhere near what they were in the early 1980s. Adjusted for inflation, a barrel of oil in 1981 would be about $70 in today's dollars. Plus, he points out, "oil-price increases have not slowed the US economy yet."
Other analysts say this is in part because a technology-driven economy - as the US is increasingly becoming - is less dependent on oil than are traditional manufacturing industries.
Still, Osten and others agree with Clinton's warning that if prices go too high, "they will cause recession in other countries." In particular, he was referring to countries trying to rebound from the Asian financial crisis.
Last week, Japan's trade and industry minister echoed Clinton's call for oil prices in the low $20s. That country is dependent on foreign oil, and in July, its cost of crude had risen 53 percent compared to a year ago - the highest since February 1991.
"If this continues, it can't help but hurt" the Asian economies, and by virtue of our trade connections, the US as well, says Philip Flynn, energy analyst for Alaron Trading Corp. in Chicago. The European central bank also is expected to raise interest rates to cool inflation - fueled in part by higher energy prices.
Even at home, there is cause
for concern. Last month, US crude-oil stocks were at their lowest since 1976, with refineries running flat out. At the same time, prices for electricity, natural gas, and oil are all unusually high - making it difficult for firms to switch to another energy source.
The reasons for the across-the-board high prices vary.
IN CALIFORNIA, the state is struggling with electricity deregulation, limited transmission capacity, and growing demand. Last week, Clinton directed that $2.6 million go to help low-income households in southern California cope with higher electricity bills.
Home-heating-oil prices, meanwhile, have surged due to low inventories of crude oil. This could hurt consumers in the Northeast, who rely heavily on oil to heat their homes. Natural gas companies are also at low inventories and have yet to rev up production.
Still, the pinch is more likely to be felt by individual consumers than by the US economy as a whole. "Gas prices have been catching up to reality. But that doesn't help the average Joe who bought a big car," says Mr. Flynn.
Oil would have to go to $60 a barrel to really cause economic trouble, says DRI's chief economist David Wyss. In the mid-1990s, he maintains, oil was in the high $20s "and we didn't have a world recession."
While he's concerned higher energy prices might slow growth in Japan and Europe, he sees no sign of world recession.
"It's premature to talk global recession," agrees Paul Kasriel, economist at Northern Trust Co. "I think you can say the president was exaggerating just a little bit." Exaggeration or not, Clinton will continue to pressure OPEC ahead of its Sept. 10 meeting in Vienna. "It looks good when the politicians are saying these kinds of things," says Flynn. "It looks like they're doing something."
And perhaps the president's pressure is not in vain. One report this week indicates OPEC will likely agree to raise production for the third time this year.
Ron Scherer, in New York, contributed to this report.
(c) Copyright 2000. The Christian Science Publishing Society