Subsea Headlines (VIA OilDrum)
With the ‘green shoots’ of recovery more numerous by the day, dark warnings of a new spike in oil prices are also multiplying. Saudi Oil Minister al-Naimi has warned that under-investment in oil capacity may lead to a return to $150/barrel oil, “or even worse”.
New research by Wall Street energy business analysts, Douglas-Westwood, suggests that when oil consumption costs exceed 4% of US GDP, recession almost always occurs. And in general, a sustained rise in the oil price of 50% or more has always been followed by a recession.
“In every case when oil consumption breeched 4% of GDP, the US suffered a recession and indeed, the current US recession began within two months of oil hitting the 4% threshold, most recently, when oil reached $80 a barrel,” said Steven Kopits, Douglas-Westwood’s LLC Managing Director.
Kopits added, “Another factor is the maximum rate of adjustment for the economy, which appears to be about 0.8% of GDP per year. That is, the economy cannot shed oil consumption instantaneously; society needs time to adjust. When the economy is adjusting at full speed, it will tend to struggle. Adjustment will tend to be characterized by recession, inflation or generally low GDP growth.
“Our research suggests that a return to $80 oil could kill the present recovery and trigger a new recession – today’s oil prices means we are again teetering on the edge.
“Looking ahead, our own firm and others have the view that the world is likely to reach a peak of oil production capacity within the next five years and that will, of course, have massive implications for oil prices.
“Should oil return to $150/barrel, as Saudi Oil Minister, al-Naimi, and others have warned, the statistics are not ambiguous. Expect a recession, and a severe one at that.”
The full research note with graphics can be downloaded here
