https://www.barrons.com/amp/articles/oil-prices-are-we-in-a-recession-51646240117
U.S. oil prices reached their highest level since 2011 on Wednesday, rising to $112.50 a barrel before falling back to $107.
At Wednesday’s peak, West Texas Intermediate crude prices were less than $8 away from a milestone that has been a bad omen for markets in the past. If WTI gets to $119 a barrel, oil will have doubled from a year ago. In three previous instances when oil prices doubled, a recession was not far away. This time, it’s not clear the same dynamic will play out. But it is a reminder that fast-rising oil prices can be bad news for the broader economy.
“History shows that a 100% increase in oil prices over a year usually triggers a recession (1990, 2000, 2008). We’re not quite there yet, but we are getting closer by the day,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note on Wednesday.
The price increases flow through the broader economy in several ways, but one of the most important is that they can pinch household budgets in a hurry.
“Household budgets don’t adapt well to large changes in gas prices and consumers cut back when they spike,” Colas wrote in an email.
One important question is whether oil prices caused those recessions, or were separate issues that happened to occur around the same time. In 2000 and 2008, the precipitating causes of the recession were the dot-com bust and the global financial crisis. In 1990, rising gas prices amid the war in Kuwait did have a significant impact on the economy, though other factors were crucial too. But even if those recessions were caused by other factors, Colas thinks oil price increases may have made the economy particularly vulnerable to shocks.
“The interesting question is whether we would have had a recession anyway, although perhaps not as bad, just due to oil prices,” he wrote. “Business cycles are funny that way: you get to the end of a long run and exogenous shocks hurt more than if they had occurred early to mid-cycle.”
So, is the U.S. headed for recession today? Economists still expect the U.S. economy to grow, with Goldman Sachs predicting 3.2% gross domestic product growth this year—though that estimate came out before the Ukraine invasion began. Economists are watching to see if corporations slow their expansion, and they are paying particularly close attention to the Federal Reserve’s next moves. If the Fed raises rates quickly to stem inflation, it could slow the economy to a halt — and the risk of “stagflation” is growing too.
For now, several signals are still pointing to economic expansion in the U.S. to counteract the impact of rising oil prices.
Importantly, households have more savings than in prior years and can potentially absorb increases for a while longer. J.P. Morgan economist Peter McCrory noted in a recent report that every 10% increase in gas prices adds $4 billion in costs to consumers and every 10% increase in oil prices adds $19 billion. Consumers could choose to cut back in response, but McCrory writes that they may instead dip into savings and continue their spending at previous levels. He sees U.S. GDP rising 1.5% in the current quarter.
“The exact consumer response to potential price increases is unknown, but we think that household savings could help consumers maintain spending volumes in the face of related price increases,” he wrote. “Households in the aggregate have accumulated about $2.6 trillion of ‘excess saving’ in recent years relative to the prepandemic trend, which all else equal could be enough to cover even a sustained 50% surge in oil and natural-gas prices for many years to come.”
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