Oil prices have surged to new highs in 2023, with the Brent benchmark crude approaching $100 a barrel. This increase in oil prices has complicated the Federal Reserve’s efforts to bring down inflation ahead of the September policy meeting and has raised fears that a U.S. recession may be on the horizon.
Historically, surging energy costs have played a role in causing recessions in the U.S. Whenever oil prices have doubled in the past, such as in September 1990, February 2000, and June 2008, the economy was either already in a recession or would soon enter one. This correlation between oil price spikes and recessions has been observed by Nicholas Colas, co-founder of DataTrek Research.
Colas explains that spiking oil prices have a significant impact on household spending habits. When oil or gasoline prices rise sharply, households are forced to quickly reduce spending in other areas. The greater the increase in oil prices, the more likely a recession will occur. However, Colas notes that this time may be different.
Previously, the U.S. benchmark West Texas Intermediate crude trended around $70 per barrel in May and June, so it would require a move to $140 per barrel to trigger a potential recession. In March 2022, WTI reached a high of $123 per barrel after Russia’s invasion of Ukraine. Therefore, investors will need to see higher oil prices than last year’s geopolitical conflict to potentially induce a recession in the next 12 months.
Despite the recent surge in oil prices, Colas believes that we are not yet near a point where rising oil prices will cause a recession in the U.S. However, if WTI rapidly rises to over $100 per barrel and continues to climb, the capital markets may start to pay attention.
Oil analyst Edward Morse, global head of commodity research at Citigroup, warns that Brent could surpass $100 a barrel in the short term due to concerns about a supply shortage and geopolitical tensions. However, he believes that higher prices are not sustainable in the long term due to faster supply growth compared to demand growth.
Overall, while the recent increase in oil prices is concerning, it is not yet clear whether it will lead to a U.S. recession. Further developments in oil markets and geopolitical events will need to be closely monitored.
Source:
– U.S. Energy Information Administration