Recoveries and Oil Don't Mix
12:00 AM, Feb 25, 2012 • By IRWIN M. STELZER
The fate of the recovery might well again hinge on developments in the Middle East. The increasing threat of an Israeli strike against Iran before it gets its weapons program safely interred in a mountain; the spreading boycott of Iranian oil; and the possibility that the U.S. navy is being overly optimistic when it says it can prevent Iran from closing the Strait of Hormuz have already driven oil prices to the highest level in nine months. Some analysts are predicting that if hostilities break out, or even if an Israeli strike merely remains on the table, crude oil prices will hit $150 per barrel, which would be an approximate $50 jump from current levels for benchmark West Texas Intermediate crude. And if Iran does succeed in closing the Strait of Hormuz, look for crude prices of $210 per barrel warns Julian Jessop, chief global economist at Capital Economics. Noting that the jump in crude oil prices during the Libyan crisis drove gasoline prices high enough to abort a recovery, some analysts are predicting a similar reaction to any crisis-induced price spike. After all, we might be entering the golden age of shale gas—environmentalists permitting—but that won’t do much to reduce demand for gasoline by the millions of cars on the road, and being produced every year.
It is not certain that the pessimists are right. Recent price increases are mere “noise,” says Christophe de Margerie, CEO of France’s Total oil group. “Let’s calm down.” For one thing, Saudi Arabia has agreed to make up any supply shortfall caused by a disruption of Iranian supplies. For another, Joseph LaVorgna, chief economist at Deutsche Bank in New York, told Reuters that the impact on family budgets of the recent approximate 9 percent rise in gasoline prices has been has been partially offset by the fall in natural gas prices. Finally, last year’s rise in gasoline prices coincided with supply-chain disruptions due to the Japanese tsunami, a factor not present this time around.
Still, gasoline prices, now around $3.65 per gallon, are at a record for this time of year, when demand is typically subdued, and although Newt Gingrich has promised to lower prices to $2.50 within a year from the day Callista hangs new curtains at 1600 Pennsylvania Avenue, anxiety persists. Michael Lynch of Strategic Energy and Economic Research is predicting that gasoline will soar to $4.25 per gallon in the next few months, which would eat up the benefits of the recent $1,000 per family payroll tax cut. That might not be a gale-force headwind, but it is surely not a wind beneath the wings of the current recovery.
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