The recent rise in the price of oil to above $100 per barrel will not send the economy back into recession according to Economists Paul Ashworth and Paul Dales from the research firm Capital Economist. Over the past month we’ve seen a 14% increase in per barrel price of oil, and it has risen 28% over the past year. This is a small increase in comparison to prior spikes that preceded previous recessions (see chart below).
Years | Rise in the Price of Oil | Time Period of Increase |
1973 – 1974 | 240% | over a few weeks |
1978 – 1979 | 150% | over six months |
1990 | 150% | over three months |
1999 – 2000 | 75% | over six months |
2007 – 2008 | 100% | over 12 months |
Presently in 2011 | 28% | over 12 months |
One reason for caution this time around is that oil is not the only commodity to increase in price. Agricultural prices are up 8% in the past month and by nearly 90% over the past eight months. So, even though oil prices remain well below the 2008 summer peak of $145 per barrel, agricultural commodity prices are hitting record highs. The two economists cited above believe that the gains in both agricultural commodities and oil prices will have only a modest impact on inflation and economic growth this year. They forecast a 0.4% increase in inflation and a 0.3% reduction in economic growth if prices hold at the current levels.
Of course, the price of oil could rise further. But equally, if tensions in the Middle East subside they could fall back. Either way, the price of oil would have to rise much higher too seriously threaten the US
We believe the key risk is how consumers actually react to the higher price of oil. Given media coverage, at what point will consumers become nervous and feel the need to pull back spending?
