Hat Tip to Instapunbdit for the link.
There are plenty of risks in the economic outlook right now, including global supply disruptions following the multiple disasters in Japan, sovereign debt problems in Europe, budget gridlock in the U.S., and China’s inflation and rate hikes. What economists are most worried about, though, is oil. West Texas Intermediate crude ended above $112 per barrel in New York trading Thursday before the Easter break. Brent crude, the European benchmark, was just over $124. The average price for U.S. gasoline, at $3.85 per gallon on Friday, continues its march toward the $4.11 peak hit in 2008.
Already, rapid growth in emerging markets in Asia and South America is pressuring tight global oil supplies. That’s what pushed oil prices to $147 in 2008, adding to the problems in the U.S. economy. The Paris-based International Energy Agency in its April report estimated that effective spare production capacity within OPEC, which supplies about 40 percent of the world’s oil, stands at 3.91 million barrels per day. Based on OPEC’s March production of 29.2 million barrels a day, that means OPEC is producing at just over 88 percent of capacity – leaving a thin margin close to the level that helped drive oil prices up in the previous decade. The turmoil in Libya has already taken most of the country’s 1.7 million barrels per day off the market, and any further supply losses would be acutely felt.
How would oil in the $140-$150 per barrel range play out? Economists say much would depend on the speed of the rise. In the U.S., a spike to that range over the narrow space of a quarter would cause a sharp pullback in consumer spending, mainly on high-priced discretionary items such as cars and home goods. The surge would generate ripple effects throughout the economy, including outsized impacts on transportation, distribution, and construction, while increasing the chance of a new recession. The recent price rise has already pushed up U.S. inflation to an annual rate of 6.1 percent from December to March, cutting spending growth sharply last quarter and hammering consumer confidence.
This is just common sense, really. If you are spending more on gas, which is a relatively inflexible need, you will have to make it up somewhere, and everybody’s credit cards are maxed out, just like America’s. We’d be in for a rough patch if we had a good President. With the one we have, things are likely to get very bad.
Tags: Gas Prices, Recession
