Those dirty hippies over at the Financial Times are worried that rising oil costs, squeezed between rising demand and tight supply, could stall the economic recovery. In an article published on April 8, Gregory Meyer and Michael Mackenzie warn:
This week oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again in the offing.
This was after a period of eight months when oil traded between $70 and $80, a narrow band that pleased oil producers without hurting consumers too much.
Such Wall Street firms as Barclays, Golsman Sachs and Morgan Stanley predict that oil prices will approach or exceed $100 a barrel by next year.
On the downside, rising oil prices "could ripple through the economy and financial markets" to drive inflation and prompt central banks to start raising interest rates.
On the upside, this could be a great time for energy investing (again):
Nicholas Colas, ConvergEx Group chief market strategist, says: "With crude oil prices marching steadily higher, portfolio exposure to the energy sector could well become a key determinant of overall investment performance through the balance of 2010."
If oil prices remain high but stable, consumers will be able to respond sensibly to it while energy producers will have an incentive to continue investing in new capacity and renewable alternatives.
However, another rally in oil futures would produce another super-spike like the one that peaked in July 2008 just under $150 a barrel.
That spike pushed the world economy into a sharp recession, after which point demand sagged and the price of oil collapsed into the mid-$30/barrel range. Prices recovered steadily over 2009 and have been trading around $80/barrel for several months.
The difference today is that most of the cheap home equity that sustained consumers through 2007 and 2008 is already gone, replaced by tight credit and steep debts.
(Note: FT requires that you sign up for a free account to read their articles. Someone should tell them about the internet.)
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