Brent Spikes up to $119 Overnight Before Easing
Business Spectator
A US recession would be fatal
Fears that the global economy could be on the precipice of a sharp slow-down spread overnight, as the oil price pushed perilously close to the level considered to be the recessionary trigger-point.
The price of Brent crude broke through $US119 a barrel, as traders worried that escalating tensions in the Middle East would disrupt global supplies. However, reports that Saudi Arabia might be prepared to boost oil production to compensate for any disruption to Libyan supplies pushed oil prices back to around $112 a barrel.
Many analysts estimate that a global recession will be triggered if the oil price remains above $120 a barrel.
Global equity markets are extremely worried that soaring oil prices will crimp consumer demand, and squeeze business profits. The countries most at risk from higher oil prices are the biggest net oil importers - the United States, China, Japan, Germany, India and Korea - which account for a large chunk of the global economy...
Already the question has turned to what steps the United States will take if its economy again threatens to plunge into recession. Taylor argues that, unlike during the past downturn, efforts to revive the US economy will be severely restricted.
In the first place, it’s unlikely that the US government will be able to help because the budget deficit is already at record levels. In fact, as Taylor notes, exactly the opposite is likely to occur.
“The US government has a funding crisis beginning in the next two weeks, which could drag out for several months, eventually leading to a shutdown of many American social services. This would be a major negative for business and consumer confidence, but more importantly it will serve to hasten the downsizing of the US public sector, cutting employment and final sales. This is likely to lead to a downshifting in the world’s expectation for US growth in the months ahead."
...Taylor raises another major factor likely to dampen the US central bank’s appetite for a new round of stimulus - the conservative control of the US House of Representatives.
“Although we have heard much from this group about spending cuts, the most important Republican for those of us in the financial world is Ron Paul, who heads the committee that oversees the Fed. His extremely restrictive view of permissible Fed activities will make it extremely unlikely that a QE3 or another innovative program will be in the wings when QE2 expires in June."
This, he says, means that “if the US economy does slow in the second half of the year, the Fed is unlikely to come to the rescue - interest rates are almost at zero and expanded fiscal spending looks unlikely. This will be the worst pre-recession position the US has ever experienced. If a recession does start it will intensify unchecked as the authorities’ hands are tied." ...
CNNMoney.com
Economy faces new threats
NEW YORK (CNNMoney) -- Just when the U.S. economy seemed to be getting its footing, a number of new obstacles risk tripping it up.
A spike in oil prices due to spreading unrest in the Middle East is the highest profile problem, but not the only one...
BBC News
Oil price: Should we fear the latest rises?
The oil price has a nasty habit of predicting global recessions.
The 1973 Yom Kippur War and the 1979 Iranian revolution both led to jumps in the oil price that presaged economic downturns.
More recently, the recession of 2008-09 was preceded by a record run-up in the price of oil and other commodities.
With energy prices already well on the rise before the latest crisis hit the Middle East and North Africa, is the global economy headed for another tumble?
Trouble and bubble
First a little history.
Oil is an international commodity whose price is set by global supply and demand.
The oil price shocks of the 1970s were very much a supply-side story: crises in the Middle East disrupted oil exports, sending prices spiralling and helping to feed stagflation in the West.
Perhaps the most important outcome was that it strengthened the hand of the Organization of Petroleum Exporting Countries (Opec), who were able to limit global supply and sustain a higher oil price long after the crises were over.
In contrast, the 2007-08 commodities bubble - in which crude oil played a leading role - was quite a different story.
Many have blamed that incident on financial speculators, but economist Paul Krugman argues that really the problem was global demand.
With populations and incomes steadily increasing in Asia, there seemed to be an inexorable rise in global energy demand.
And with a finite limit to the amount of hydrocarbons in the ground, "peak oil" - the point where global oil production reaches its highest practicable rate - became the buzzword.
Double whammy
So what do we face now? The 1970s or 2008?
Unfortunately the answer could be a combination of both...