Only A Recession Stands in the Way of $200 Oil

Posted by Jeff Rubin on March 2nd, 2011 under SmallerWorldTags: , ,  • 38 Comments

With very limited excess capacity in Saudi Arabia and the rest of OPEC, further production shutdowns in the convulsing Middle East will soon push oil prices to new record highs. The Brent futures contract, the world’s benchmark price, almost reached $120 per barrel in London last week. With gasoline soon to cost  six pounds a gallon (£1.32 pounds/liter), the British government is already considering  alternative rationing systems to the brute price mechanism at the pumps.

Amid the chaos sweeping through the Middle East, it is easy to lose sight of where oil prices were trading before the political protests began. Brent was north of $100 per barrel before protestors started sweeping into Cairo’s Tahrir Square. The triple digit price for oil was due to runaway global demand, which by the end of last year had soared to more than a record 87 million barrels per day. It was yet not about potential supply shocks from Libya or anywhere else in the Middle East.

Now throw in supply disruptions from the world’s largest oil producing region, and it isn’t hard to find a path to $200 per barrel oil.

When I first predicted $200 per barrel oil prices in 2008 as the chief economist of CIBC World Markets, it was in the context of expecting another four years of global economic growth. Of course, that didn’t take into account the impact of triple digit prices on fuel-dependent GDP growth. Even $147 per barrel prices brought global economic growth to a screeching halt.

It is all the more remarkable that despite triggering the world’s deepest post-war recession and a rare, albeit temporary decline in global oil consumption, oil prices had already soared back to triple digit levels even before the Arab revolt.

And it will be difficult to keep prices from moving even higher as investors start piling on the oil bandwagon, particularly when they see most of Saudi Arabia’s much touted four million a barrel a day excess capacity is largely of the fictional variety while, at the same time, noticing how little effect monetary tightening is having on restraining China’s exploding fuel demand.

What speculators will have to worry about is where things are going. If we learned anything from the last recession, it was our oil dependent, transport heavy, global economy doesn’t run very well on $147 per barrel crude.

And other than bailing out bankrupt investment banks and automobile companies at the cost of record public-sector deficits, not much has changed in our economies over the past three years to suggest our next encounter with that these kinds of prices will lead to a different result.

We are moving inexorably closer to another oil price induced recession. And when we get there, oil demand and oil prices will once again collapse.

The only question is will we see $200 per barrel oil first?

  • Ian Brett Cooper

    It really won’t matter if crude oil hits $200 per barrel. The market will bear what it can, and if it can’t go higher, we’ll be in recession. That may happen at $120 per barrel, $150 per barrel or $200 per barrel. The dollar amount it’s at when the crash happens doesn’t really make a difference. Personally, I think the economy today is probably less able to take high prices than it was in 2008, so we may find the recession coming sooner (and at a lower price) rather than later. But we’ll just have to wait and see – and, of course, prepare for the worst while expecting the best.

  • Anonymous

    Exactly, one other question is if it is even capable of getting to the triple digits again after the second dip we’re starting to experience.

    If the illusion of regaining growth eluded people throughout 2010 maybe in the next few months the obvious will be better grasped and we can finally work towards adaption without sacrificing quality of life significantly.

    But first, from tax exemption and short-term rationing to simple denial, here come the paliative political measures that will attempt to (mis)handle the problem.

  • Anonymous

    I still can’t believe people keep on talking about money, when they should be talking resources. Mainstream politics and media are a disgrace.

  • JB

    Oil at $147 per barrel in July 2008 brutally broke the back of the economy.

    With oil price now rising steadily (Brent: $116, NYMEX: $103), another wave of serious economic turmoil should be expected. Except that this time governments’ finances are in much worse condition than in 2008… Borrowed economic stimulus plans will therefore be considerably harder to implement.

    Needless to say that if social unrest was to spread to major Middle East oil exporters (such as Saudi Arabia) and disrupt oil supplies, we could be catapulted into an altogether NEW ERA…

    The economy could collapse through outright lack of an available minimum energy supply. The transportation sector in that regard is particularly vulnerable and we could see war time rationing measure being rapidly implemented. But in some cases even rationing might not be enough…

  • Rojelio

    Another oil induced recession? Sorry, I must have missed the end of the first one. I would also like to know when technology is going to give us 100mpg trucks, flying backpacks and maybe some bacteria that fart hydrogen gas; you know, something besides new cell phones.

  • ivokar

    Is there a way to subscribe to the blog by RSS? Not just the comments? I’d LOVE to connect via RSS. Webmaster, can this be arranged, please?

  • Anonymous

    I wrote an article on that issue here:

    Enjoy! :)

  • Rojelio

    Thank you. Enjoyed your article on one of my favorite websites. For those of us who desperately want technology to help us out of this mess, it’s getting harder to ignore that the new slimmer iPad isn’t really helping us to deal with, for example the situation in Libya or that 1 in 14 Americans are now on food stamps.

  • theone
  • Denny

    Today the dysfunctional nature of the market reach a new level of absurdity. Stock futures advance while oil retreated because of a rumored peace treaty by a lunatic dictator (Chavez) to solve the chaos initiated by another lunatic dictator (Khadafi). Jeff has been correct on his call for higher oil prices thus far and will be correct in the future despite a stock market that seems to believe Ben Bernake’s observation that oil and inflation are not connected. With this type of wise guidance from the Fed chairman and the steady hand of Hugo Chavez steering international diplomacy, perhaps $200 oil will be delayed a bit longer.

  • Rojelio

    Check out this story about how this instability is actually causing flight away from the dollar rather than towards it. The once unthinkable is now reality.

  • Dusko

    Jeff I still can’t believe we are going to have economic growth in the world without cheap and abundent fuel. You are doing your best to sell optimism in a world about to go bad. Please explain how we grow in a world where economic growth is directly tied to vehicle miles travelled? And how can that growth be sustained given that we are dismantling the ecology to fuel the economy?

  • Ian Brett Cooper

    The way we move the economy forward is by changing the dynamic. We essentially retool the economy so that it’s no longer tied to oil. That way, the economy can continue to grow. But if we stay tied to oil, then of course the economy will tank until it forces us to get off oil. Either way, we eventually get off oil dependence and into a world in which the economy grows again. Hopefully, this new world’s economy will be more sustainable (although I have my doubts that it will be).

  • Anonymous

    Another commentator suggested the US economy can handle $130 a barrel oil but goes downhill after that. That seems about right to me, especially as I remember conditions on the ground during the runup in 2008. There is also the possibility that each time we have the runup and rundown the ceiling gets higher, which comports well with the ideas in Rubin’s excellent book.

  • Sharondomey

    Having purchased and read your book, I applaud the foresight and positivism of the preface.
    It seems the universe is expanding and unfolding as it will.

  • Anonymous

    I agree, the optimistic tone he sets about local economies in very reassuring, although it makes most western governments poop themselves. If there was one thing I would like was if Jeff would post just a tad more frequently and participate in the debates every now and then.

  • Bellerophon

    Hey Cleit. Good to see your internet access has been restored now that your windmill has thawed.
    For all the gloom and doomers a ray of hope.

  • Anonymous

    Yeah, it been F****** freezing :(

    And the windmills haven’t been turning all winter cause its been so quiet :)

  • Ian Brett Cooper

    Yes, the oil shale, tar sands etc. will indeed be a great oil resource. If we ever get to a sustained price of over $120 per barrel and if we want to trash great swathes of our nation to do it, we can power the gasoline addiction of those of us who are willing to pay $5.00+ per gallon and we can also sell really expensive oil to those rich (but soon to be poor) nations whose governments are too stupid to find other ways of getting their energy.

  • Bellerophon

    The SandP 500 is now 86% correlated with the Fed’s balance sheet. There is currently no oil shortage but rather a currency oversupply.
    Canadians are now filling up with non-alcohol hi-test at $5.50 per US gallon and the economy is steaming along. Get rid of alcohol and lower the cost of food. Anybody burning alcohol is indirectly guilty of unmentionable crimes against humanity. Don’t do it.

    Nobody has to trash anything to develop more energy supplies if it is done in an orderly, engineered way. There is no substitute on the horizon for this energy and it is ridiculous to refer to energy use as an addiction.

  • Bellerophon

    He said enough already. Alarmism is causing energy poverty among poor people by adoption of poor policy driven by environmental extremists.

  • Bellerophon

    They need jobs in the oil exploration industry. Get rid of politicians blocking them. That’s your salvation.

  • Dhouston

    The only way we get to 200 or even 150 again is if the middle east situation deteriorates dramatically and I just don’t see that. The middle east situation is the only thing that sent oil past 90 dollars this time.

  • Ian Brett Cooper

    If I recall correctly, the situation in the Middle-east blew up two months AFTER oil was starting to get into the $90 range. Either way, oil has been heading steadily upwards since at least April 2010 with nothing but supply/demand pushing it.

    I see WTI crude oil easily going past $110 this week and $120 the next if Libya is still in turmoil and nothing else changes. After the Libya issue resolves, I see a sell-off to 85 or 90, followed by a return to the $3/month rise we’d been seeing before the Middle-east blew up.

    But if Saudi experiences big protests after today’s protest ban, then all bets are off and we could see $150 very soon indeed. Saudi is the key.

  • Dhouston

    I think it may spike to 120 but that’s it the S&p will rollover. I don’t think we’ll get a superspike to 140 or 150 this time. The market has learned what damage this has caused last time so we’ll see a quick rollover in growth and a drop in oil back to 90 dollars or so. We are in scary territory right now on oil. Already people are cutting back because they know what happened last time.

  • Unc

    Jeff, I am with you on that one,the only possible thing that might and I stress might is a massive nato reorganization in the middle east where the old model of oil production management is changed to a more democracy based system. The one ace in the hole in North America is, that we do have going for us is natural gas,but and that is a big butt in my mind with respect to shifting to a more natural gas supply equation in a timeley manner, I am afraid we are in for a tune-up and it aint gonna be a cheap one,however at the end of the day, as usual,the market will determine our standard of living. Unc. Fort st john B.C.

  • M Black

    I have followed Jeff Rubin for a while, and he tells it like it is. CIBC really dropped the ball when they let him leave!

  • Anonymous

    $5.00 a gallon is on the horizon. We should be thinking about $10 per gallon. I live in an area where I can ride my bike year round and I grow 55% of the food for our family. I also used to be a vegetarian for 10 years during most of the 70′s and early 80′s, so I can transition from steak to beans (which I also grow). Get a grip – grow a garden.

  • Anonymous

    How many times will humanity bump their heads on the ceiling before figuring out that they shouldn’t try to stand up so fast?

    Eventually, we need to learn to only stand so high and adapt to the downward sloping roof. If we can’t do that, we are in for continual cranial injury.

    Eventually, we will learn how to make an ever expanding solar roof so that we can once again walk freely with comfort, this time appreciating our environment.

  • Anonymous

    One only needs to examine the estimates by the tar sands operators themselves to come to the conclusion that this messy non-renewable resource cannot scale enough to counteract global crude production declines.

    Additionally, lawsuits and problems with chemicals and NG getting into water tables will obviously increase the cost of the non-renewable shale gas resources.

    Perhaps working towards sustainable energy solutions makes a bit more sense? Everything else is just putting out fires and should be considered necessary short-term evils.

  • Anonymous

    Looking at the percentage of the average household budget for liquid fuel and food is a great way to estimate when these costs will cause another recession. Guess what? They are now at the point where past recessions were triggered.

    We all talk about complex causes for recessions but all it comes down to is people need to eat and get to work. The rich and educated simply cannot understand this most basic of drivers because their liquid fuel and food budget is just a very small proportion of their inflated incomes.

    The rich and powerful will get their fuels and the wealth gaps will return back to the levels seen during the time of kings and queens.

    This movie should be titled: Back to the Past

  • Anonymous

    Once we get our oil use under control, the next limit will surface. Fish stocks, fresh water, depleted soil, lack of fertilizers and pesticides (previously provided by the use of fossil fuels), clean air, stable climate cycles, etc.

    Think of humanity as a five-year-old still breast feeding from his mother, Mother Nature. The depleting milk resource is in terminal depletion while the nutritional requirements increase for the growing child. Eventually, that child needs to be weened. This is the point where humanity has reached. We have grown too big for Mother Nature to support, all on her own. We must now use other resources and learn to carefully utilize the limited resources; these same resources that we once thought of as unlimited.

    The child eventually becomes an adult and stops growing. The resource use also stabilizes and thus can be planned more efficiently. This is analogous to population levels. We must learn how to maintain populations levels at a point where we all can live high standards of living without going outside the boundary of sustainable resource use.

    We have a long way to go and a lot of learning to enjoy. The good news is that humanity still has 65 million years or so to figure out how to get off this planet before the next scheduled extinction event.

  • Anonymous

    I bet they can’t wait to start a career in a dead-end industry that is in terminal decline. That growing green stuff is for liberals and losers! ;)

  • Anonymous

    Will you still deny when there is a second bump on your head? What about the third bump? How many bumps will it take?

  • Anonymous

    lol. Good one! It is alarmism, not something so solid and concrete and easy to analyze as the production of crude oil, that is the true cause of our problems. Great!

    The sad thing is that nearly 50% or more of Americans actually drink this Kool-Aid.

    Is it really true that a high ranking leader responsible for driving American energy policy actually stated that it is impossible for global warming to happen because Noah said there will not be another flood? If so, that is scary stuff.

  • Anonymous

    I think we should consider two factors: Oil price and the length of time at a given price.

    Thus, the longer we are at inflated prices, the more it squeezes already tight budgets. People can hang on for a while but eventually their reserves run out.

    This seems to be what is happening right now around the world. The price is not going up as fast as it did back in July 2008 but it now seems to be a more permanent condition. More people understand that cheap fuel is a thing of the past and they must really start to change their ways, or go deeper into debt. This will result in lower GDP levels and recession and stagnation of the global economy.

    Now, can we learn to live without economic growth? Without major resource wars and panic? Can we peacefully adapt to more austere living standards or will the rich and powerful step on the poor and weak to maintain their illusion of endless milk and honey? Those are the questions that will be answered in the next few decades.

    If I were a betting man, I would say that it is going to get ugly, very ugly, before the green shoots pop out.

  • Vic

    Oil currently at $48. This guy was so out to lunch.

  • Ian Brett Cooper

    Oil won’t stay at or below $48.