“If we do get oil prices of $100, $125 or $150, you reach a severe pain threshold, and not just for the U.S.” said Bernard Baumohl, chief economist of the Economic Outlook Group in Princeton, New Jersey. “There’s nothing vague or ambiguous about it. You reach a pain threshold in the triple digits, and there is a much higher probability of a global downturn. … It would be cataclysmic.’’
Baumohl isn't a believe in the recession theory, though. "You can have a statement made that drives [oil prices] up one day and down the next, the key is to focus on fundamentals," he said. Assuming no major geopolitical crisis, and that is a big assumption, we expect to see a downward slope even with Iran sanctions."
The reason: U.S. shale output will continue to rise from what is already a record level. "By next year, the U.S. will be the largest producer of oil in the world," Baumohl said.
U.S. West Texas Intermediate crude oil prices were around $68 on Monday, while Brent crude oil was near-$73.
The issue of more expensive crude and its economic ripple effects boils down to two questions: What would happen if crude really went up above $100, and how likely is that scenario, really?
The first question can be answered, at least partly, using some established rules of thumb about how much spending on gasoline cuts into other consumer spending. Baumohl cites an estimate that every penny added to the price of gasoline reduces consumer spending by $1 billion a year. Zandi estimates that every $10 added to crude prices would reduce U.S. growth by 10 to 15 basis points, or 0.1 to 0.15 percentage points, in the year after the increase.
Going from $50 to $75, which has already happened, will reduce growth by a quarter of a point to nearly half of 1 percent, Zandi said. If oil hit $150, an economy recently growing near a 3 percent rate would see growth fall by half, and that’s before higher prices sparked inflation and forced interest rates higher, Baumohl said.
“I think $150 oil in a short period would suck the wind out of the expansion,” Zandi said. “Recession risks would be very high.”
Before the 2008 recession, the price of Brent crude, traded in Europe and used in most of the world, rose to about $140 in June of that year, a month before U.S. prices for regular gasoline topped out at an average of $4.11. Today gasoline costs on average about $2.87, according to the Department of Energy.
Oil prices also spiked right before the 1990 downturn, running from $15 in May to $40 by September as Iraqi dictator Saddam Hussein invaded Kuwait. It then jumped from $10 as the dot-com boom gathered steam in late 1998 to nearly $30 by the time the Nasdaq average peaked in early 2000.