CNN/Money One for credit card only hard offer form at $9.95 One for risk-free form at $14.95 w/ $9.95 upsell  
News > Jobs & Economy
graphic
Oil-shocked into recession?
Economists say record oil is already taking a bite out of growth; some fear recession could follow.
October 12, 2004: 8:02 AM EDT

NEW YORK (CNN/Money) - Economists agree that oil prices have already spiked enough to take a bite out of the nation's economic growth. But what they can't agree on is whether this downswing could spiral into a full-blown recession.

 QUICK VOTE  
Will rising oil prices throw the U.S. into a recession in 2005?
  Yes
  No
  Too early to say

   View results

Oil futures on Tuesday moved above $54 a barrel for U.S. light crude, up from the fifth straight record close it hit Monday.

On an inflation-adjusted basis, however, recent prices are still below the highest prices of the 1980 oil shock. The $38-a-barrel peak then would be the equivalent of about $79 a barrel today, said Fadel Gheit, Oppenheimer oil analyst. In 1990, when Iraq invaded Kuwait, oil approached $40 a barrel -- between $60 and $65 in 2004 dollars, he said.

But Gheit holds the minority view that today's oil price levels are already enough to cause an economic contraction.

"We're the walking wounded," he said. "We've already been hit, and in the next three or four months is when we'll stumble."

Gheit said one advantage for the economy is that it's far less dependent on oil today than it was in the 1970s or 1980 oil shocks.

“ I think $80 would probably break the back. ”
John Silvia
Wachovia Securities

"Our dependence is almost one third of what it was 30 years ago," he said. "We're moving into more of a service economy, not dependant on smokestack industries. Thirty years ago there was no Microsoft."

Other economists aren't quite as concerned about contraction, although most say there has been a significant impact on the economy from current prices.

"I think energy affects us at every price. As we go marginally higher, growth forecasts get marginally weaker," said Steven Wieting, senior economist at Citigroup. "At roughly $50, oil should be holding back GDP (gross domestic product) growth by a full percentage point in the year to come. Fortunately, we have more than a percentage point to give."

But even some of those who believe $50 oil increases will have only a limited effect say they're concerned about how fast prices have risen. In little more than four weeks, they've skyrocketed about 25 percent.

"The problem we have had in the past four weeks is that the speed of the increase is unprecedented," said A.F. Alhajji, energy economist at Ohio Northern University. "We've been talking about economic growth in the face of $50 oil for a while, but we were talking about it increasing gradually."

YOUR E-MAIL ALERTS
Oil and Gas
Federal Reserve
Economic Indicators

Still, other economists say they're not overly concerned about the economy falling into contraction or recession, even though past oil spikes have produced just such economic woes.

"There are times when the economy is quite vulnerable, so a gentle push (from oil) can tip the economy into actual recession," said Anirvan Banerji, director of research at the Economic Cycle Research Institute, which forecast the 2001 recession based partly on the oil price increase seen in 2000. But Banerji said the economy is showing greater strength today in other measures than it did in 2000.

"A rise in oil prices might take a bite out of growth. But is there a magic number of what's enough to trigger recession? No," he said.

John Silvia, chief economist at Wachovia Securities, is another economist who believes it will take a combination of high oil prices and other factors, such as significantly higher interest rates, to actually spark a recession. But he says some of the worst-case scenarios for oil prices do worry him.

"I think if you had $70 oil, and the Fed were to continue to raise interest rates to fight inflation, that could cause a problem," Silvia said. "I think there's a certain breaking point where that the price of energy alone is so high that it changes the psychology of both businesses and consumers. I think $80 would probably break the back."  Top of page




  More on NEWS
Judge won't force GM to issue 'park it now' order
Walmart offers less costly money wire service
Obama would cut deficits by another $1 trillion
  TODAY'S TOP STORIES
Beer, grilled cheese and clean clothes
8 million sign up for Obamacare
The car GM never wanted to build




graphic graphic

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.