Can the Economy Survive $200-a-Barrel Oil?

A superspike in oil prices would create huge challenges for U.S. and global growth.

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It's an economic experiment I would rather not take part in: seeing how $200-a-barrel oil would affect the U.S. and global economy. "The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty is what Goldman Sachs economist Arjun Murti wrote earlier this week. (Note that Murti blames the weak dollar for a good part of the continuing rise in oil prices.)

Murti is hardly alone in such seemingly spectacular speculation. Analysts at Deutsche Bank and CIBC World Markets, investor Jimmy Rogers, and the current president of OPEC have all made such forecasts.

And what would such a price rise do to the economy? Market strategist Ed Yardeni thinks he has a pretty good idea (bold is mine):

A super-super spike would most likely put a stake in the heart of global economic growth. A global economic downturn would be the most likely outcome, led by a longer and deeper recession in the US. Then again, in this scenario, the price of oil would probably fall rapidly and sharply back down to $100 a barrel, or even lower, as demand weakened. Wouldn't the drop in oil prices then revive economic growth? Normally, it would, but if the super-super spike occurs, the resulting longer and deeper recession could trigger the dreaded "negative feedback loop" from the credit crisis.

My take: In addition to the economic impact, I think you would see political opposition to increased oil drilling and nuclear power—necessary to create a "hydrogen economy"—get a real beat-down from public opinion. Do Americans really want to spend a $1 trillion a year on gasoline?