With oil prices within spitting distance of triple-digit levels (Brent traded over $99 per barrel last week, while West Texas Intermediate was north of $90 per barrel), it may be time to reconsider just how long this recovery will run.
The fact that we’re seeing oil at triple-digit prices in this cycle should come as no surprise. After all, that’s where oil prices ended up last cycle before deep-sixing the global economy. But to see triple-digit prices again this early into what by all historical standards has been a painfully slow global recovery must be disconcerting to a world economy never hungrier for growth.
If merely getting back to pre-recession levels of global industrial production has oil knocking at the gates of triple digits, where do you think crude will be trading should we be fortunate enough to sustain this economic recovery for another year?
If anyone doubts how vital oil is to economic growth, just look at what happened last year. Global oil demand grew at two and a half per cent from the year before (almost double the International Energy Agency’s original forecast for 2010). China alone added almost one million barrels per day to its daily petroleum diet. Should demand grow by another two to two and a half per cent this year, crude prices could easily be taking out last cycle’s high of $147 per barrel. And if the speculators jump on the bandwagon, the forecast I made three years ago for $200-per-barrel oil prices in 2012 may yet pan out, the recession of 2009 notwithstanding.
But where would that leave the global economy? While economists may not formally consider oil as a factor of production, oil and economic growth are inextricably linked. In a world where conventional oil production hasn’t grown in over half a decade, that connection means that continued economic expansion can only be at ever-increasing wellhead costs and ever-higher crude prices, provided, of course, that soaring oil prices don’t do what they have always done before—cause major recessions in oil-powered economies.
Every major global recession over the last forty years has had oil’s fingerprints all over it. The first OPEC oil shock led to a devastating recession in 1973, only to be followed by the double-dip recessions on the heels of the second OPEC shock. When Saddam Hussein invaded Kuwait and lit its oil fields on fire, pushing oil up to the then unheard-of high of $40 per barrel, once again recession quickly ensued. And of course, when oil prices surged to a record-high $147 per barrel, the deepest post-war recession ever followed close behind.
So why should we expect our next rendez-vous with those prices to yield any different results?