$100 Oil Cripples The Economy
The price of a barrel of crude has topped $100 three times. The most recent was March 2, 2022, due primarily to the Russian invasion of Ukraine. It also rose to that level in 2008 and 1980. In 2008, the cause was tension in Nigeria, a huge oil-producing nation. The 1980 oil price counts only if an inflation adjustment is considered. Each period, primarily the most recent two, has something in common. If crude stayed above $100 for long, experts insisted it would have crippled the US economy badly.
The talk of $100 oil has recently returned. Goldman Sachs said there were several reasons crude could rise to that level. And, it added, the economy would suffer. A few days ago, the conflict between Israel and Hamas triggered more concern that oil could top $100 in the next few weeks. S&P Global analysts wrote this week: “Hamas’ surprise attack on Israel has fanned worries of a long-drawn period of geopolitical turbulence in the Middle East at a time when oil markets have already been facing a squeeze in global supplies, while demand has strengthened, led by jet fuel.”
The association between $100 oil and severe economic problems is not entirely direct. It involves an overall concern about inflation, how the Fed reacts to the threats of inflation, and how it tries to adjust the economy after that.
The first shock to the consumer is that a sharp rise in crude causes a nearly identical rise in gas prices. This analysis, even from people who are not economists, is simple. When middle-class or lower-class Americans must pay higher gas prices, their discretionary income decreases. Sometimes, even the ability to buy essentials suffers. The more a family must drive cars, the worse the situation becomes.
According to the Federal Reserves, the oil price problem was much more complex in 1973 and 1979. During both times, prices rose due to unstable activities in the Middle East. The second of these was also combined with high crude demand.
The Fed faces similar problems today since oil, combined with other components of the CPI, is a trigger for inflation. The Fed raised rates in the hope of solving the problem. In 1973, the issue wasn’t resolved quickly. Inflation continued, and the economy slowed.
If $100 oil hits the economy hard again, inflation will be a problem. The Fed could make it worse.
