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Will Oil Price Shock Kill the Recovery ?

Demonstrators hold up a banner featuring Libyan leader Moamer Kadhafi reading 'Kadhafi is a murderer' as they stage a protest outside the Libyan embassy in Istanbul on February 21, 2011
Mustafa Ozer | AFP | Getty Images
Demonstrators hold up a banner featuring Libyan leader Moamer Kadhafi reading 'Kadhafi is a murderer' as they stage a protest outside the Libyan embassy in Istanbul on February 21, 2011

Massive instability in North Africa is terrible news for a fragile US recovery: Though just how terrible remains to be seen.

The New York Times cuts to the chase this morning:

"Higher oil prices restrain growth because they translate to higher fuel prices for consumers and businesses. Mr. Lafakas [a Moody's energy economist] estimates that oil prices are on track to average $90 a barrel in 2011, from $80 in 2010, an increase that would offset nearly a quarter of the $120 billion payroll tax cut that Congress had intended to stimulate the economy this year."

Those are staggering numbers.

It is a truly sobering thought to get your head around: What appears to be a nominal jump in prices—ten dollars a barrel—could offset a public policy initiative that was political wrenching for the country.

No debate, no discussion.

Poof: $120,000,000,000. Gone. Just like that.

What may be worse is this: The events in Libya and Egypt, even if they turn into best case scenarios, will still cause swollen energy prices for some time to come.

As the Times explains:

"Even if energy costs don’t rise higher, lingering uncertainty over the stability of the Middle East could drag down growth, not just in the United States but around the world."

Daniel Yergin, whose heavy weight book 'The Prize' became required reading for anyone interested in the energy markets in the early nineties, encapsulates the uncertainty—and the risk—thusly:

"We’ve gone beyond responding to the sort of brutal Technicolor of the crisis in Libya," said Daniel H. Yergin, the oil historian and chairman of IHS Cambridge Energy Research Associates. "There’s also a strong element of fear of what’s next, and what’s next after next."

And so on.

The message is clear. Major political events in oil producing countries (Libya), and in oil transporting countries (Egypt), are not simply one off events.

Nor can 'favorable outcomes', after the initial instability has past, easily placate the energy markets.

Egypt and Libya—and whatever may come next—represent durable challenges for the global economy.

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