Saturday, December 3, 2011

Will Oil Remain at $100 Per Barrel After the Dec 14 OPEC Meeting?

What will OPEC decide to do at their meeting on December 14? According to Al Arabiya News "OPEC officials are predicting a low-key gathering unlikely to make major changes to output policy". However, the deficit ridden economies in Europe, Japan, and the U.S. all desperately need lower oil prices. Thus, even a low key decision to keep oil at $100 per barrel is disastrous for oil importing nations. The global economy is in dire shape due to the debt and deficit crises and high priced oil exacerbates the problems.

The correlation between spikes in oil prices and U.S recessions suggests that oil prices of $100 per barrel by itself might be enough to throw the U.S. economy into a recession. Combining the almost certain softening of demand from Europe with high oil prices would be devastating to the U.S economy. As shown in the chart below the recessions of 1973, 1980, 1981, 2007 all occurred concurrently with spikes in the cost of oil.

The profligate government spending in Europe, Japan, and the U.S. have led debt levels that have become so large that austerity measures are now required. However, the austerity measures will hurt economic activity. In Greece the unemployment rate has doubled to 18% in little over a year, in large part to due imposing austerity measures. In the U.S., state and local governments shed 20,000 jobs during November due to budget restraints.

Given the drag that austerity measures are going to apply on economies in the developed world, the additional burden of $100 a barrel is likely to be too much for most nations' economies to overcome. Thus, while global economies may be headed into recession even if oil comes down in price, a global recession is almost a certainty if oil prices remain at $100 a barrel. And if oil spikes back up to $120 a barrel or more , the result could be disastrous for the world's most debt ridden economies, including the U.S.

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