Will the Economic Recovery Slide on $90 Oil?

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The U.S. economy is gaining steam. But will high oil prices derail the recovery?The U.S. economy has just started to gain some steam, with manufacturers' humming, exports rising and companies finally adding jobs. But now high oil prices threaten to derail the fragile recovery.

The price of oil, which has stood above $80 per barrel for months, recently cleared the $90 mark. And the rise has not gone unnoticed in public-policy circles. The International Energy Agency, an energy-policy adviser to 28 countries and others, says the costly crude prices jeopardize not only the U.S. economy but also the global recovery.

"Oil prices are entering a dangerous zone for the global economy," IEA Chief Economist Fatih Birol said in a statement earlier this month. "The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil-consuming countries and to the oil producers."

Birol added that "it may not be a bad idea that the producers are ready to increase production and show their understanding that these high prices are not good for the global economy."

OPEC: Don't Blame Us

Although high oil prices increase the GDP in oil-producing economies, such as Saudi Arabia, Kuwait, Russia and Venezuela, they also increase costs for consumers and businesses. And that lowers GDP growth in oil-consuming nations, with the U.S. at the top of the list. And while the rise of emerging markets, such as China, India, Brazil, Mexico and Russia, means the global economy is less dependent on a growing U.S. economy, a domestic slowdown still would hurt global commerce.

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Still, the desire to increase oil production -- and thereby lower prices -- is hardly unanimous. OPEC, which includes 12 countries that produce some 40% of the world's oil, says it's not to blame for the high oil prices.

Contradicting the IEA's position, OPEC's Secretary General Abdalla El-Badri on Jan. 17 rejected the notion that more production was needed. He said the talk of tightness in the oil market was "incorrect," FT.com reported. "At the moment, fundamentals show there is more than enough oil on the market," El-Badri said.

And a day later, OPEC released an official statement chastising the IEA and citing other -- nonproduction -- variables as the biggest reasons for rising prices. "Oil prices have recently been driven by technical matters such as events in Alaska and the North Sea. Also, the weak dollar and speculation have added to this, pushing oil prices higher, especially Brent [oil]," OPEC said.

Indeed, the dollar's value and oil speculators have played roles. Because oil is priced in dollars, its value tends to grow when the dollar weakens, as it has in the last six months. Also, investors use oil as a hedge against a weaker dollar or as an alternative asset, which has helped push crude's price up as well.

Will Oil Prices Stay in the "Dangerous Zone"?


But the growth in global oil demand, which the IEA expects will rise to 89.1 million barrels per day in 2011 from 87.7 million barrels daily in 2010, can't be ignored as a factor in higher crude prices.

In OPEC's defense, the group already has increased oil production recently. The IEA estimates that the cartel pumped 29.58 million barrels per day in December, representing a rise of 250,000 barrels per day from November.

But that hasn't been nearly enough to stem the rising oil prices. After all, the rate of 29.58 million barrels per day remains well below the 32 million barrels per day that OPEC produced in mid-2008, and the IEA estimates that the group is holding out roughly 5 million barrels per day of spare production capacity.

If the dollar strengthens by 20% to 30% -- and stays there -- or stocks see a long-term boom that forces money out of oil, the price of oil would fall. But absent those two trends, it's hard to see how to limit oil price gains without increasing oil production. And that would mean that oil prices would likely move further in to "the dangerous zone" for the U.S. and global economies.
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