Oil Hits $100 Per Barrel: Is The U.S. Economy Hanging In The Balance?

The continuing chaos in Libya could have a serious impact on the U.S. economy, especially if it spreads to other oil producing nations.

The uprisings in the Arab world are beginning to have an economic impact:

Oil prices continued to climb and stocks drifted lower on Wednesday as reports emerged about the disruptions of crude operations in Libya.

As the fighting in Libya raised the prospect of turmoil spreading in the Middle East and North Africa and weighed on global financial markets, Col. Muammar el-Qaddafi has kept his grip on the capital, Tripoli, but large areas of the east of the country remained out of his control. There were also indications that the fighting had reached the northwest of the country.

Oil companies responded by starting to curtail operations and evacuate workers, according to media reports. The Italian company Eni said in a statement that natural gas supplies from Libya via the Greenstream pipeline have been suspended, but that it would still be able to meet customer demand.

ENI, the Italian oil company, Repsol of Spain, Total of France, Statoil of Norway and BASF, the German chemical and energy company, have halted much if not most of their oil production in Libya and moved personnel out of the country. Others, including the British giant, BP, said earlier that they were evacuating workers.

Much of Libya’s oil producing capacity and port operations are in the eastern part of the country where the government has lost most political control.

In a research note, Barclays Capital estimated that around 1 million barrels a day of production has been shut in, or more than half the country’s total.

All of that has helped to drive oil prices to a two-year high and spurred increases in gasoline prices, despite efforts by Saudi Arabia to calm the markets by saying that OPEC was ready to compensate for any shortfalls related to the unrest in Libya. The country produces about 2 percent of global daily output.

Benchmark crude for April delivery was up $4.36 cents at $99.78 a barrel in New York trading, briefly touching $100 at 1:05 p.m. The contract jumped $5.71, or 6.4 percent, to settle at $95.42 on Tuesday. In London, Brent crude for April delivery rose $5.54, to $111.32 a barrel.

“The oil market is clearly very jittery,” said Harry Tchilinguirian, senior oil market analyst at BNP Paribas in London. “It’s adding up the additional oil barrels that could be lost if the problem spreads to Algeria and the Gulf.”

https://www.outsidethebeltway.com/wp-admin/post-new.php“No one can say what will happen in Libya but the risks are clear,” Mr. Tchilinguirian said. “If violence increases, infrastructure is damaged and force majeure is declared, exports will dry up.”

In fact, Reuters reported on Tuesday that Libya had declared force majeure on all oil-product exports, meaning it could miss contractual obligations because of circumstances beyond its control.

Additionally there have been reports of attempted sabatoge at Libyan oil facilities and reports that pipelines have been turned off. At this point. the market is reacting both to the threat of lower supplies and general uncertainty about where all of this heads next. If Libya falls and this moves on to nations like Algeria or even Saudi Arabia, then you can expect oil prices (and domestic gasoline prices) to continue to rise. If that happens, there's the threat that increased energy costs could dampen the already anemic economic recovery here in the United States:

The price of oil influences more than just how you heat your house or drive your car.  Since most manufacturing uses oil in at least some of their manufacturing process, even if it just to get product to the market, when the oil began to spike in 2006, people who could barely afford their mortgages began to have to choice between their bank payments or basic staple items whose costs were driven up by their energy costs. A few months later, when the price increases led to interest hikes in existing mortgages, the house of cards holding up the housing market collapsed.

Indeed, Jeffery Rubin noted in 2008(PDF) that most politicians and economists were ignoring the role that the mid-2000's oil spike played in the economic downturn that started in 2007:

While most of the world’s newfound economic ills are being attributed to the ongoing crisis in world financial markets, and its associated source, the US housing market crash, both the timing and size suggest something else may be afoot.

By any benchmark the economic cost of the recent rise in oil prices is nothing short of staggering. A lot more staggering than the impact of plunging housing priceson housing starts and construction jobs, which has been the most obvious brake on economic growth from the housing market crash. And those energy costs, unlike the massive asset writedowns associated with the housing market crash, were borne largely by Main Street, not Wall Street, in both America and throughout the world.

Certainly oil shocks are no stranger to recessions. Four of the last five global recessions were preceded by one, Yet the recent spike in oil prices doesn’t seem to get any credit

That’s odd because it should. Curiously, an over-500% increase in the real price of oil gets virtually ignored as a culprit behind today’s economy, eclipsed by the ongoing crisis in financial markets. Yet the run-up in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock. And those oil shocks produced two of the deepest recession in the entire post-war period, including the 1980-82 double dip.

So the prospects for the U.S. economy if these rebellions continue to have push oil prices up are quite dicey indeed and, to be honest, there isn't really much we can do about it.

 

FILED UNDER: Economics and Business, Middle East, US Politics, World Politics, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020.

Comments

  1. Steven Plunk says:

    The economy has been stalled with $80 a barrel oil. $100 a barrel will reverse any recovery.

    That gulf oil, ANWR oil, and Canadian pipeline are sure sounding good right now.

    Take a look at previous oil run ups and you will find unemployment follows right behind. Until we look at energy in a comprehensive manner instead of the rainbows and unicorns fantasy of wind and solar we will never see a stable recovery.

    Drill baby drill will soon be replaced with fracture baby fracture as fracturing old wells is leading to an increase in domestic production. Unfortunately the bridge oil was never allowed to be developed 10 years ago.

    We can also look to the Commodity Futures Trading Commission’s failure to curb rampant speculation. We have 20 year high inventories yet hedge funds force oil higher and higher.

    The lack of leadership in energy is inexcusable.

  2. Ben Wolf says:

    This would have happened even without the fluid situation in the Middle East. Oil production hit its peak in 2004/2005 and has been flat despite growing demand in the developing world.

    This is going to be the pattern for at least the next decade:

    1) Static supplies and growing demand will push oil back into the $140+ range.

    2) Costs will rapidly increase on virtually everything in our economy, initiating a recession.

    3) The recession will reduce demand, resulting in a temporary decline in oil prices.

    4) Eventually the economy will begin to recover, pushing oil prices to a new record high.

    5) The economy enters another recession.

    Rinse and repeat

  3. anjin-san says:

    Good thing the conservatives have been so successful in keeping public transportation in check, otherwise we would be in trouble.

  4. Ben Wolf says:

    Steve,

    There isn’t enough cheap oil on the continent to lower gasoline costs more than a few pennies per gallon. We’ve used it up, and that’s why we’re moving toward unconventional oil sources that are far more expensive.

    Speculation wasn’t the cause of the last oil spike, growing demand and inelastic supply were the culprits.

  5. anjin-san says:

    Gulf oil does sound good. If bush had not turned the regulatory environment into a joke there would have been no disaster and no disruption…

    As for anwar, in the big picture, it simply is not very significant.

  6. Steven Plunk says:

    Ben, Peak oil has always been more of a threat than a reality. Fracturing of existing and future wells could change it all. A black swan event in energy. It’s not just here but around the world this new technology will be applied.

    Various agencies have concluded that speculation did have an effect on the last run up in 2008.

  7. Rick Almeida says:

    “Fracturing of existing and future wells could change it all. A black swan event in energy. It’s not just here but around the world this new technology will be applied.”

    What does this word salad even mean?

  8. john personna says:

    “Peakers” let their doom run away from them, but you know Steven, you’d have $2 oil right now (or less), if they were completely wrong.

    Right now I’m inclined to believe a Peak Light scenario, just because we have so many low hanging fruit in the efficiency department. I know, I was just out on the interstate and saw those thousands of full size pickup trucks, one driver, empty in the back.

  9. john personna says:

    (To the main topic, it is entirely possible that this could reverse the recovery, but I don’t see it as a sure thing. It all depends on whether prices stay up, and if the cost-sensitive segments have moved to higher efficiency.)

  10. JD says:

    Well fracturing has been around for decades.

  11. sam says:

    @Plunk

    “We can also look to the Commodity Futures Trading Commission’s failure to curb rampant speculation. We have 20 year high inventories yet hedge funds force oil higher and higher.”

    Holy Moly, Flying Porker alert! Flying Porker alert! Plunk advocates government intervention in the market!

    (The new comment regime disappeared faster than Steve’s consistency.)

  12. Ben Wolf says:

    Steve,

    Fracturing will have no effect on prices because the technology is extremely expensive. This is a fact.

    But we have another, more serious difficuly. Oil isn’t like other commodities because its primary use is as an energy source, which makes it subject to the laws of physics.

    Energy Returned on Energy Invested (ERoEI) is how much energy we get back for the amount we invest in extracting it. In the 1930’s We had an ERoEI of 100-1; for every barrel of energy invested in extracting oil we got a hundred barrels back. Today those same conventional oilfields yield a ratio of roughly 10-1, a decline in ERoEI Of 90%. Techniques such as fracturing and sources like shale or tar sands yield an ERoEI of 3-1, the minimum estimated for the industry to remain profitable.

    Cheap, easy to extract oil is a thing of the past and isn’t coming back.

  13. Brummagem Joe says:

    Steven Plunk says:
    Wednesday, February 23, 2011 at 14:21
    “The economy has been stalled with $80 a barrel oil. $100 a barrel will reverse any recovery.”

    Steven Plunk gives us another of his totally erroneous statements. Total GDP is back to pre Bush recession levels, the Fed has lifted its 2011 forecast to a max of 3.9% while many private forecasters are putting it 4% plus. Perhaps he need to look up the definition of the word stall?

  14. Brummagem Joe says:

    How much of an economic headwind this turns into depends entirely on how long it lasts and any actions with it reserve the govt might make. As of now I’d say it’s quite likely to go down as quickly as it went up but but obviously this depends on the cours of events. Libya to put it in perspective only produces about 2% of the world’s oil and much of it goes to Europe. Saudia Arabia could easily make up any shortfall and probably will if the disruption continues for any length of time. Any threat to the recovery with oil at these prices is fairly slight and if it became a real threat the govt could release supplies from the reserve, then watch prices tumble.

  15. reid says:

    BJ: Steven’s too busy taking on the real culprits here, solar and wind energy. I hope our next president is cool and dismantles all those solar and wind farms! (Reference to Reagan and White House solar panels there.)

  16. Brummagem Joe says:

    reid says:
    Wednesday, February 23, 2011 at 15:04
    “BJ: Steven’s too busy taking on the real culprits here, solar and wind energy.”

    Don Steven Plunk? That would explain a lot

  17. Brummagem Joe says:

    As an aside the market fell today by 100 points or so, we’ll see if it’s over reacting in the next few days. These sort of overheated panic dips can create buying opportunities. If anyone is interested.

  18. reid says:

    Heh, Don Steplunkxote…. (Just having a little fun, Steven.)

  19. ponce says:

    Gasoline costs 3 times as much in Europe as it does in the U.>

    America’s economic problem is we have a really shitty crop of businessmen dragging our economy down with their herd mentality idiocy.

  20. Dave Schuler says:

    Gasoline costs 3 times as much in Europe as it does in the U.>

    Much of that is because gasoline taxes are so much higher there than here. That has its advantages and disadvantages. One of the advantages is that you’re much less vulnerable to the ups and downs of the price of crude than we are are.

  21. Steven Plunk says:

    Ben, I agree fracturing has been around but take some time to peruse oil and gas publications online and you will see the new techniques are changing what was once considered unrecoverable to recoverable. The fact Occidental is investing over $6 billion dollars into it’s Bakersfield holdings is proof to me something is going on. Now imagine that change world wide.

    Rick, I can’t help it if you don’t understand what fracturing is or what a black swan event is. Read a little about energy and you’ll learn those two terms.

    BJ, The coming double dip will confirm what I’m saying. What’s the unemployment rate again? That’s the real measure of a recession, not GDP or anything else.

    reid, Nobody wants to tear ’em down but building things that are not cost effective and telling people they will solve our problems is the wrong path. Ask the government of Spain.

    What many fail to understand about oil and gas prices is the effect it has on consumer sentiment. When prices are high consumers become fearful and restrain spending. That’s not my imagination running away but reality. Every oil shock we have endured resulted in immediately higher unemployment.

    I know liberals don’t get this because they have been to busy trashing oil companies and American business to look at it. Regardless there is no way we can truthfully say this country has had a realistic energy policy for decades. We still import most of our oil (even though Canada is a friend we are exporting jobs and wealth) and we still find ourselves subject to the whims of dictators and chaotic world events. We need to encourage more drilling for oil and gas, conservation, and even some alternative fuels (ask the investors in Range Fuels how that worked for them).

    And I really don’t mind the having fun with the windmill thing.

  22. Tlaloc says:

    “So the prospects for the U.S. economy if these rebellions continue to have push oil prices up are quite dicey indeed and, to be honest, there isn’t really much we can do about it.”

    Anytime a neutral statement like this is made it is worht pointing out that there is a concrete reason we can’t do anything about it- the right has for decades refused to acknowledge our energy problems because the solution is not business friendly. We could have been diversifying our energy infrastructure for the last century. We absolutely SHOULD have been doing so since the 70s proved how critically vulnerable we were to an oil disruption. But we didn’t, and the reason we didn’t is because of the literally fascist collusion of business and politics found in the GOP. There is someone to blame here, there’s nothing good about pretending otherwise.

  23. Brummagem Joe says:

    “BJ, The coming double dip will confirm what I’m saying. What’s the unemployment rate again? That’s the real measure of a recession, not GDP or anything else.”

    Steven Plunk speaks again. What a pity the people who’ve forgotten more about economics than you’ve ever known don’t agree with you. What DD? The Fed and most private forecasters say GDP growth is going at or around 4% which means were looking at approaching 5 next year Some people have massively increased their net worth over the last two years (hohoho). You’re obviously not one of them. Eat your heart out Steven Plunk.

  24. Brummagem Joe says:

    “What many fail to understand about oil and gas prices is the effect it has on consumer sentiment.”

    Steven Plunk: mastermind, economic genius, legal giant…I worked in the oil business for 25 friggin years so I have some slight idea…..of course couldn’t compare with your natural genius…how old were you when you learned to play the violin?

  25. Brummagem Joe says:

    “I know liberals don’t get this because they have been to busy trashing oil companies and American business to look at it. ”

    Au contraire I’m one of BP’s, Shell’s, Exxon’s, Schlumbergers, Halliburtons, greatest fans. If you bought into these businesses 18 months ago you’ve made a lot of money. Why must you assume we’re programmed like you? (i will admit quite a lot of the far left are but then so are a lot of the fringe right to which you appear to be a fully paid up member).

  26. anjin-san says:

    > What’s the unemployment rate again? That’s the real measure of a recession

    Actually, it’s not. but don’t let facts interfere with a perfectly good rant.

  27. Ben Wolf says:

    This is a pretty good article on why oil would rise even without the events in the Middle East, and why we won’t be able to depend on Saudi Arabia to counter it.

    http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/why-saudi-arabia-can-no-longer-temper-oil-prices/article1918139/

  28. anjin-san says:

    Careful BJ, Plunk will fire up his well honed whine about his “facts” not being taken seriously…

  29. Steve Plunk says:

    anjin, Your usual empty comment I see. Substance, my friend, is what separates my posts from yours.

    BJ, Another example attacking me instead addressing the issue. Is that you guys do?

    Come on. I expect at least some reason, logic, and common sense. Keep snickering about me all you want but for gosh sakes don’t engage in a genuine manner.

    Ben, You seem to be the only person who will actually talk. For that I thank you.

  30. Brummagem Joe says:

    Steve Plunk says:
    Wednesday, February 23, 2011 at 20:57
    “BJ, Another example attacking me instead addressing the issue. Is that you guys do?”

    Well tthat would be difficult since you’ve all you’ve done is bloviate and generalize. We’re going to have a DD recession (Steven Plunk)…forecast growth this year around 4%….GDP is not how we measure economic heatlh (Steven Plunk)..Incorrect…All liberals hate big corporations….Incorrect.

  31. Steve Plunk says:

    Ben, After reading your link I understand what you are saying but urge caution on reaching conclusions about Saudi Arabia. Having one ex-official make the claim of lower reserves and no capacity to increase production doesn’t mean it’s true. More information is needed and I still believe new drilling techniques will lead to higher well yields around the world.

    We also should keep in mind the replacement of oil in certain applications by natural gas. UPS is experimenting with CNG as a motor fuel in it’s fleet. City buses here in my town once ran on CNG and with the price going down may soon again. Electrical generating plants have used petroleum but can now look to natural gas as well. There’s good news out there when we look for it.

    There is no doubt hedge fund money has a material effect on oil prices. Funds that get into oil future contracts are big enough to push it higher and anytime money flows into contracts the prices are forced to go up. It’s a bubble burst cycle that the CFTC should get a handle on by limiting positions and forbidding large players from forcing the market.

    A quick release from the strategic reserve could drop prices and teach a lesson to those who take advantage of world turmoil in this fashion.

    Again, thanks for being an adult and conversing like one.

  32. Brummagem Joe says:

    BJ, Another example attacking me instead addressing the issue. Is that you guys do?

    Instead of making asinine claims how is 4% GDP growth a DD recession…Please explain…and no unemployment is NOT the principal measure of economic well being, if you believe this you’re just demonstrating yet again the extent to which you’re a know nothing …I’m just trying to correct your deep ignorance so why are you resisting?

  33. Brummagem Joe says:

    “A quick release from the strategic reserve could drop prices and teach a lesson to those who take advantage of world turmoil in this fashion.

    Again, thanks for being an adult and conversing like one.”

    Funny I thought I said that in one of the first comments on this thread viz:

    ” Any threat to the recovery with oil at these prices is fairly slight and if it became a real threat the govt could release supplies from the reserve, then watch prices tumble.”

    Perhaps you didn’t read it or is comprehension problems?

  34. Tlaloc says:

    There’s currently 724 million barrels in the Strategic Reserve. We use 20 million barrels a day. It doesn’t take a lot of math to realize our ability to drive prices down is extremely short lived.

    Not only that but it’s completely retarded to use a strategic reserve to offset some sticker shock. Particularly in the face of evidence that compelling argues the price is only going to rise on average.

  35. anjin-san says:

    > A quick release from the strategic reserve could drop prices and teach a lesson to those who take advantage of world turmoil in this fashion.

    The Babe Ruth of stupidity speaketh…

  36. ponce says:

    “It doesn’t take a lot of math to realize our ability to drive prices down is extremely short lived. ”

    Oil prices are currently being driven up by the morons on Wall Street using taxpayer supplied bailout money.

    A few lengthy jail terms for these greedy treasonous freaks would drop the price of oil rather rapidly…

  37. sam says:

    Matt Yglesias points t this story on The Economist website, Tax away vulnerability, which reinforces Dave Schuler’s point made above:

    Petrol prices in America are substantially below levels elsewhere in the rich world, and this is almost entirely due to the rock bottom level of petrol tax rates. The low cost of petrol encourages greater dependence; the average American uses much more oil per day than other rich world citizens. This dependence also impacts infrastructure investment choices, leading to substantially more spending on highways than transit alternatives. And this, in turn, reduces the ability of American households to substitute away from driving when oil prices rise.

    See, the graph in the story — we pay the lowest price in the developed world for our gas.

  38. Gerry W. says:

    Don’t know why you can’t have one president that says “this is our plan.” We should have done something 30 years ago. Instead, we supported puppet regimes and ignored the worlds problems and our own infrastructural problems. Boone Pickens has spent millions and testified before congress, and yet little is done. At this point, I don’t care who profits in our country as we are just sending our money to the Middle East and being dependent on them. We should be doing all we can do to be energy independent. Off shore drilling is a must, with oversight. Boone Pickens estimated some 33% of imported oil is used on the 18 wheelers. This can be solved with natural gas. All alternatives should be considered except corn. You don’t use food for oil. And it is reported this week there is a shortage of corn for food for the world. Conservation should be used but it is difficult in a country like ours as the car is king and we commute many miles.

    Whether or not the Middle East has a crisis, it was just a matter of time to have an oil crunch. Any signs of recovery in our country and we use more oil, and with China wanting to be more middle class, and we see we do not have enough oil to supply the world on a day to day basis.

    The amount of money spent on tax cuts was just wasted money. If that money would have been put into our infrastructure and solving our problems, we would have been better off. You have to do everything from drilling for oil, conservation, alternative energy, coal, power grids, and nuclear energy. There is no time to play games. And always we should strive to have a clean environment, but that takes time and money. Getting away from OPEC oil is the first priority.

  39. Bo Hammond says:

    You point out that the last two global economic recessions were preceded by pressure on oil prices. If oil was the predecessor, housing market busts were the sustainers. So, how does a pending oil crisis fit when housing is already busted and we are already 3 years into a recession? Do we double dip? I think we are emerging from our current recessionary period largely due to our increased interdependence on world markets, particularly Asia,specifically China. So, oil price increases won’t derail economic improvement. Oil price increases will be the catalyst for inflationary pressures, but controlled inflation is actually a boost for manufacturing and manufacturing will provide a boost to the US economy.

  40. john personna says:

    “See, the graph in the story — we pay the lowest price in the developed world for our gas.”

    I believe you can pretty much guess a nation’s subsidy or tax based on their percentage of exports or imports.

    For a long time we were a net exporter, and have now been tipping into importer territory.

    “drill drill drill” folk have a fantasy (or are misinformed) that we can become self-sufficient again at will. That sentiment contributes to a tax level that is inconsistent with reality.

    The national gas tax should be a bit higher, because imports grow.

  41. john personna says:

    BTW, we will though always have lower gas tax than 100% importers.

  42. john personna says:

    Tlaloc, it depends on what we mean by “strategic” doesn’t it?

    If it is for war, or similar dire straights, we aren’t there yet … and it would be fuelish to blow it beforehand.

  43. salty says:

    Guys, why couldnt we convert coal into oil for cars, and convert 18 wheelers to run on natural gas? Seems like if the Germans could do it 65 years ago, we might be able to do it now….I read that a conversion plant cost 4 billion to build, and could produce 15 to 20 million gallons of coal oil a year. So we put the construction industry back to work, to build the plants, then we convert all 18 wheelers to run on natural gas…oh, and build some damn nuclear plants as well….we are not going to be able to run cars on electricity that can only go 60 miles on a charge, and that take 7 hours to recharge…not for my normal drive per day…and by 2020 all cars are converted to run on coal oil….

    Or do we just wait for gas to go to $140 a barrel and call it a day for the economy? When the riots start, it is not going to matter that we are green and clean….

    I work near one of the largest tourist area in the United States, the Smoky Mountains, 10–15 million visitors a year. Every tourist business in the area is currently freaking out, as gas here in TN reaches $3.35 a gallon. When it hits $4 a gallon, the party stops, and the visitors are substantially reduced. As far as most of my accounts are concerned, the recession never stopped, and the same sentiment is shared in Florida, where I left….nobody on the ground cares if the employment rate moves up or down by .01 percent, because the feeling is, the numbers are so skewed that it is a joke…..if I understand it correctly, it all depends on who they count as unemployed…most cannot find work that replaces the income they have lost, with a part time job, or an underemployed position….most are hanging on, barely, and as gas goes up and stays up, discretionary spending is cut proportionately…