Swiss bank UBS released a report warning that even a moderate rise in oil prices could trigger an US. recession — with huge political and economic impacts.
Higher oil prices could cause increases in global inflation and stunt industrial growth, the bank warns. All it would take is for the barrel price of oil to rise to $100, or more.
Brent Crude is at around $76 at this writing.
When the price of oil rises too sharply it causes spikes in the cost of fuel. That causes inflation to jump, too. Rising inflation in turn leads consumers to spend less.
According to UBS, $100-a-barrel oil prices could stunt global economic growth and hurt the oil industry significantly, shaving off more than $100 billion dollars’ worth of global economic growth.
The price of oil has not reached triple digits since August 2014. In recent years, the price has been in the $50 to $60 a barrel range.
Brent Crude is up by more than 50% price increase since late 2017. West Texas Intermediate, the American oil pricing benchmark, is at about $67 a barrel.
What concerns industry analysts is what occurred in the past after similar oil spikes.
Oil price spikes occurred shortly before five of the last six economic recessions in the United States. The recent $80 spike was the 11th-largest price spike in 70 years.
“The global sweet spot — where oil prices may have positively contributed to global growth — seems to be somewhere between $50 and $70 a barrel,” wrote UBS analysts.
Consequences
Several recent global geopolitical occurrences could be to blame for the recent spikes in the price of oil.
“A combination of global demand strength, OPEC restraint, and geopolitical and sanctions related uncertainty,” wrote the UBS analysts.
The price of oil began rising shortly after the Trump administration re-imposed significant sanctions upon Iran, an oil exporter.
Potential sanctions and a collapse of societal and governing infrastructure in Venezuela, another major oil producer, could be a contributing factor as well.
In fact, a potential infrastructure collapse in Venezuela could negate Saudi Arabia’s attempts to keep oil prices steady at current levels.
Oil prices reaching $100 would have far reaching consequences. For instance, jet fuel, which can represent over a third of an airline’s expenses, will become more expensive.
Such costs will ultimately result in higher airline fares and fees. According to the AAA, the price of gasoline is now $2.91 a gallon, a 25% rise in prices since 2017
Currently, global inflation levels are a little over 3%. UBS warns that a $100-a-barrel price spike could push that number to above 4%.
Some experts are forecasting that oil prices will stabilize soon. Norway’s petroleum and energy minister, Tord Lien, said in 2016 that $100-a-barrel oil serves no one’s interests.
“We saw oil prices hitting $140 a barrel, and that does not contribute to economic growth. I’m not hoping for it,” said Lien.
