by Calculated Risk on 7/25/2005 05:49:00 PM

Back in April, on Angry Bear, I suggested that a sustained oil contract price above $50 per barrel might lead to a recession.

UPDATE: By "contract" I mean actual price paid for oil, not Futures contract. The DOE provides the average price paid per contract on a weekly basis. When measuring the impact on the economy, I want to look at the actual dollars paid. Sorry for any confusion.


Click on graph for larger image.

The average contract price for a barrel of oil has been above $50 for four consecutive weeks.

The DOE expects this trend to continue and they are projecting spot prices to "average $59 per barrel for the third quarter of 2005" and "above $55 per barrel for the rest of 2005 and 2006".

NOTE: Actual contract prices are usually $5 to $10 per barrel below spot prices.

Based on my earlier calculations, I believe the price of oil is now in the danger zone for the economy. The good news is the price is being driven by growing demand as opposed to a supply shock like in '73 and '79. We will probably see some slackening of demand in the near future and that should lead to somewhat lower prices.

EDIT: Greenspan believes the current price of oil will not hurt the economy:

Should the prices of crude oil and natural gas flatten out after their recent run-up--the forecast currently embedded in futures markets--the prospects for aggregate demand appear favorable.

However he cautioned:

Energy prices represent a second major uncertainty in the economic outlook. A further rise could cut materially into private spending and thus damp the rate of economic expansion.