High oil prices could be an economic disaster

Monday, March 5, 2012
By Paul Martin

By Kirk Spano
MarketWatch.com
March 5, 2012

There have been arguments in the media that high oil prices are fine for the stock market and the economy. Don’t believe the hype.

High sustained oil prices would be a disaster for the economic recovery, the stock market and probably the bond market. Defining high and sustained is the challenge.

In the 1973, 1980, 1991, 2001 and 2007 recessions, oil jumped and maintained a price threshold that was too high for the economy to take. In each case, the stock market corrected and in most cases bonds suffered in varying degrees as well.

In early 2011, the price of oil crested only to retreat. A recession in 2011 was avoided, however, the recovery is exceptionally slow even into 2012, albeit for many reasons, including continued fallout from the financial, real estate and sovereign debt markets. Stock prices showed extreme volatility and corrected in mid-2011.

In early 2012, oil prices are cresting again. The stock market is continuing a rebound rally, but the economic recovery remains tepid. At this point, energy costs account for about 6% of disposable income nationally which has not indicated “too much pain” in the past. However, a number approaching 8% has generally been a “hurt” point for consumers and the economy. At a sustained oil price around $120 per barrel or higher, the economy would suffer as the pain threshold is reached.

The Rest…HERE

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