Crude oil barrel at $100 'not necessarily very high': OPEC president
While the inflation adjusted numbers make the current prices not the highest we have seen, the point is irrelevant. The relevant issue is that all US recessions have been preceded by an oil price shock. The run-up in price over the last twelve months constitutes a price shock. A price shock is foremost a significant unanticipated change in price. We have had that with gains of over 50% since the beginning of the year. The shock will be worse if the level stays above $90 per barrel. The price has only broken the $90 per barrel level for two months.
Whether it is a demand shock from higher growth, a supply shock from a lack of production, or a risk premium shock which inflates futures prices, the result is the same. Higher prices will affect relative consumption. Wealth will move from oil users to oil producers and will affect the relative growth around the world. Consumption in oil producing countries will offset some of the decline in consumption in western countries, but it is highly likely that growth will slow in the US. This will affect US capital markets. The impact will be cushioned because oil producing countries do not have as developed capital markets, so some of the profits will be plowed back into the West. Petrodollars are alive and well and will flow to what are considered the best opportunities which may include US fixed income if we have a recession.
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