A Double Dip

Article excerpt


In 2010, oil demand will resume its upward march. OPEC will respond by increasing supply--but the lag will come too late to keep prices down as emerging-market consumption pushes them up. In the extreme case, resurgent oil prices could drive the U.S. economy into a double-dip downturn. Here's what to expect, and what a limited oil supply will mean for the United States and the world.

As the global economy recovers, oil demand will continue to strengthen from the 85 million barrels per day that it hit in November. That's already 4 percent higher than it was at the recession's trough in May of last year. As a result, inventories both onshore and offshore have begun to decline. The number of tankers storing crude oil in the Gulf of Mexico, for example, fell to seven in October from a high of 22 in May.

Many rightly see this trend as a sign that recovery from the deepest recession in generations is happening. But this nascent resurgence holds the seeds of its own destruction. As oil prices rally, economic performance and employment could remain subpar, and a new recession might even be in the offing. The investment bank Goldman Sachs has forecast oil to hit $90 per barrel in 2010. That would mean the United States would be spending 4.5 percent of its GDP on oil, putting the kind of burden on its economy that has historically triggered recessions. According to an analysis prepared by my consulting firm, the U.S. economy has slipped into recession whenever crude oil consumption has exceeded 4 percent of GDP.

Not all countries will share the pain. Oil producers will do quite well. OPEC has described $75 to $80 per barrel as a "fair" price, and "fair" in this usage means "quite good. …


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