Will $100 Oil Threaten Economic Recovery?

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As commodity prices surge, oil is fast approaching $100 a barrel. Brent crude, a key benchmark for oil prices, hit $95 a barrel for the first time in over two years on Monday, according to The Financial Times.

Reuters notes that oil prices are increasing based on a mixture of market speculation and expectations that a rebounding global economy will fuel energy demand. But some analysts are concerned that high oil prices will imperil economic recovery:

  • Oil Prices Endangering Global Economy, warns Fatih Birol, the chief economist for the International Energy Agency, as quoted in the Financial Times. "Oil import bills are becoming a threat to the economic recovery," he says. Birol urges oil producers like OPEC to increase production and oil-consuming countries to step up efforts to reduce their dependence on oil, particularly for transportation. He adds that the ratio of countries' oil import bills to GDP--a metric for evaluating the cost of oil prices on economies--is nearing levels last seen during the 2008 financial crisis.
  • Will 2011 Be Like Oil Price Run-Up of 2008? asks Gail The Actuary at The Oil Drum:
World economies are now much weaker than in late 2007. Several countries are having problems with debt, even with oil at its current price. If the oil price rises by $20 or $30 or $40 barrel, we can be pretty sure that those countries will be in much worse financial condition ...

I believe the limit on how much oil will be supplied is not the amount of oil in the ground; rather the limit is how high a price economies can afford. This in turn is tied to the true value of the oil to society--whether oil can really be used to produce goods and services to justify its price. The problems we experienced in 2008, and may experience in the not-to-distant future, suggest that we may be reaching this limit.

  • Benefits from Bush Tax Cuts May Be Squandered, says Douglas McIntyre at 24/7 Wall St. "Most Americans believe [the tax cuts] will give them more discretionary income this year. The higher price of gas and other commodities could take away all of those tax savings quickly. That, in turn, would take consumer confidence back down again."
  • We Must Prepare for $3 Gas, argues Lisa Margonelli at The Atlantic. She notes that the national retail average for gasoline is $3.07 per gallon--higher than it's been since 2008:

On a local and national level, we need to think of new ways to get people to work--or let them stay home. Congress should discuss giving emergency tax breaks to companies that either encourage telecommuting or provide carpool incentives to their employees. Startup companies that help people find trustworthy carpool buddies, or otherwise get from A to B with less gas should be encouraged.

  • And There Are Consequences Beyond the Gas Tanks, adds Laurie Segall at CNN, citing higher home heating bills and airfare hikes.

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