If it stays long above $100 per barrel, recession could return
Each day that the per-barrel price of crude oil hovers near $100, chances increase that the still-sputtering U.S. economy could stall.
Soaring oil prices over time have proved ruthless in their treatment of the American economy - 10 of the last 11 recessions were preceded by a spike in oil prices.
Whether this latest run-up is enough to derail the recovery or simply shave a percent or two off the economy's growth rate remains to be seen.
The situation has the attention of people who watch markets for a living.
When oil prices top $100 a barrel, "that territory typically spells trouble for the economy," said Ethan Bellamy, senior energy research analyst at Robert W. Baird & Co.
"I would not at all be surprised to see another recession in 2012 based on the dampening effect of higher energy prices," he said.
Crude oil closed Monday at $96.97 per barrel, down from the triple-digit prices it touched earlier in February but up 23%, or $18.26, from where it was a year ago. That's enough to send ripples through the nation's collective wallet, market watchers and economists say.
"We're already elevated enough, price-wise, that we're going to start seeing some impact on the economy," said Jim Ritterbusch, president of Ritterbusch and Associates, an oil trading advisory firm in Galena, Ill., about 10 miles south of the Wisconsin state line.
Americans who are spending more on gasoline, diesel and propane - all refined from crude oil - have less to spend on other things, "whether it's food or clothing or whatever," said Kevin Kliesen, a business economist at the Federal Reserve Bank of St. Louis who studies energy markets.
The national average price for a gallon of regular unleaded gasoline jumped to $3.37 Monday, up nearly 27 cents a gallon in a month and 66 cents from a year ago, according to the AAA/Wright Express Daily Fuel Gauge Report.
The numbers begin to add up quickly.
U.S. oil consumption is about 20 million barrels a day. For every $10 increase in the price per barrel, $200 million a day that would have been spent some other way is used to buy petroleum. Multiply that by a year and the total ends up around $70 billion.
"You're talking about a half a percent of GDP," said Mark Griffin, chief investment officer for Milwaukee-based Clifton Gunderson. "It's a big deal."
GDP, or Gross Domestic Product, measures the total output of goods and services of a nation's economy.
"Our expectation is for roughly 3% GDP growth," Griffin said. "If oil goes above and stays above $100, we're probably going to have to revise that downward."
The effects touch everyone and reach far beyond the neighborhood gasoline pump.
"Crude oil prices are embedded by way of plastics and fuel costs in just about everything in the modern industrial economy," Bellamy said. "Look around your home or office and every molecule was in some way moved or manufactured with a liquid hydrocarbon."
One look at the stock market last week shows the potential impact. As oil prices were spiking early in the week, stocks were headed in the opposite direction. Major indexes posted gains for February, despite dropping 1% to 2% last week.
"The dynamic changed . . . when the civil unrest (in the Middle East) spread from a non-producing country to an oil-producing country, Libya," Ritterbusch said.
The uninterrupted rise in crude prices ended on Thursday when the price per barrel dropped.Not fatal
James Hamilton, an economics professor at the University of California-San Diego who has studied oil price shocks extensively, says the U.S. economy can keep growing at $100 a barrel. "I don't think it's going to be enough to derail the recovery," he said.
"It is putting a burden on household budgets, but we've got some good news elsewhere to offset it," Hamilton said, referring to data showing the overall U.S. economy is recovering.
If oil prices move above $100 per barrel and stay there, then a greater impact would be felt. "This is potentially a bigger story if it gains momentum," he said.
"I think it has subtracted from growth already," he added. With the economy forecast to grow 3% to 4% this year, "even if you take a half percent off, or one percent, that's still growth."
Small businesses locally say they are trying to deal with fuel cost increases and absorb as much of them as possible.
At E-Freight Courier in Brookfield, the company is watching the situation closely, said Patrick Engeleiter, president and owner.
"How profitable we are as a company, a lot of it is very dependent on fuel," Engeleiter said. The company specializes in transporting medical items, including equipment, specimens and blood used in transfusions.
The company is trying not to pass higher fuel costs on to customers, Engeleiter said. If the cost continues to spike, he might have no choice, he said.
He's not alone.
"It's having an effect in how I set my rates," said Steve Ball, owner of Star Line Trucking Corp. of New Berlin. "It adds to the cost of the products we haul. "You can't automatically pass it on," he added. "Everybody's paying for it in the long run.
That frustration grows with each crisis that grips the Middle East.
Oil price spikes "keep coming back, and we keep talking about them," Hamilton said.
He rattles them off - the Suez crisis of the late 1950s; Arab oil embargo of the 1970s; the Iranian revolution in 1978-'79; the Iran-Iraq war in 1980; the first Persian Gulf War in 1990-'91. "There's a long history of these things."Smaller disturbance
This time it's different, at least so far.
Each of those price shocks resulted from a major disruption in the world oil supply in excess of 5%, Hamilton said. "Even if Libya were to go totally offline, that would still be less than half the supply disruption of those other events."
Also, this time around, the world has a plentiful supply of crude oil and the world's second-largest producer, Saudi Arabia, has unused production capacity it can tap to make up any shortfalls.
Russia is the world's largest producer.
U.S. imports from Libya are almost zero.
In addition, American companies are well-positioned to handle a price shock, Griffin said.
"They can absorb it for a while," he said. "The higher-quality companies are spectacularly profitable today."
Also, not much time elapsed since the last time prices shot up.
"I don't think we're quite so vulnerable to that at the moment, partly because people still remember $4 a gallon gasoline," Hamilton said. "I don't think even $3.50 a gallon has the same kind of shock value it had the first time."
Where it eventually ends up is anyone's guess.
Still, Hamilton said, "I don't think we're headed back to the days of cheap gasoline."
***TOP 10 OIL PRODUCERS
(in millions of barrels per day)
Saudi Arabia: 8.3
United States: 5.4
United Arab Emirates: 2.4
***TOP 10 OIL EXPORTERS
(in millions of barrels per day)
Saudi Arabia: 6.4
United Arab Emirates: 2.0
Source: U.S. Energy Information Administration, 2009 statistics