Oil at $80 a barrel could trigger a new US recession, according to energy analyst Douglas-Westwood.
The firm said yesterday that, with the green shoots of recovery more numerous by the day, dark warnings of a new spike in oil prices were also multiplying.
It noted that Saudi Arabia’s oil minister, Ali al Naimi, has said underinvestment in oil capacity could lead to a return to $150 a barrel oil.
The warning came last month from the influential minister of the world’s top oil exporter at a G8 energy summit in Rome, when he said Saudi Arabia was maintaining a long-term focus rather than being swayed by the volatility of short-term conditions.
He added, however: “If others do not begin to invest similarly in new capacity-expansion projects, we could see within two to three years another price spike similar to or worse than we witnessed in 2008.”
In July last year, oil prices climbed to a record above $147 a barrel in New York. Douglas-Westwood said new research by its New York office suggested that, when oil consumption costs exceeded 4% of American GDP, recession almost always occurred and, in general, a sustained rise in the oil price of 50% or more had always been followed by a recession.
Steven Kopits, the firm’s managing director in New York, said: “The current US recession began within two months of oil hitting the 4% threshold, most recently, when oil reached $80 a barrel. 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 characterised 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 mean 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 a barrel, the statistics are not ambiguous.
“Expect a recession, and a severe one at that.”
Oil prices fell nearly 4% yesterday to below $67 a barrel as the dollar firmed and amid concerns over economic recovery.
US crude for July delivery traded down $2.62 to settle at $66.93 a barrel, while Brent crude slid $2.21 to $66.98.
