The $63 Trillion Tipping Point: What oil price level will tip the world economy into recession, again?

Consumer behaviour seems to respond to oil price hikes more quickly than in the past.

Oil has re-entered the US$90s price range in spite of occasional strengthening of the dollar. The reasons include record- setting winter weather in the northern hemisphere, boosting demand for heating oil. What are the implications of these higher energy prices for tottering national economies this time around?

In 2009, economist Nouriel Roubini stated that “oil at $145 a barrel was a tipping point for the global economy as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly to $90 a barrel.”

Economist Tony Twine says oil prices are behaving more like a currency, but laughs off concerns about oil prices curbing economic growth, suggesting that only at $200- $300/barrel would these concerns be valid.

But according to oil industry commentator Andrew McKillop, the tipping point is lower and closer than most people think. Calling this level “the $63trillion question” [a ballpark value for global GDP], McKillop suggests $90/barrel is the trigger price for quite high Keynes-type multiplier effects across the global economy. Beyond $125 there are increasing negative feedback processes, which become very strong at $135/barrel.

A source from one of SA’s largest retail banks echoes this figure, but points out current oil expenditures account for only around 8% of gross national spending.

While various world economies may show different absolute tipping points, some companies, notably in the airline industry, have more specific and easily identifiable margins. Airline industry expert Michael Boyd calls $100/barrel the critical level where “every airline in the world is obsolete”. McKillop sees “ritual shudders” for world economies starting as low as $100.

According to energy economist James Hamilton, oil prices “only start to matter when they make a new three-year high. We probably won’t have to worry about crossing that threshold until June 2011, which would put the big spike in oil prices three years behind us.” When oil expenditures exceed 6% of GDP the US economy tips into recession, he adds. “My guess is $90/barrel would likely put us back above 6%.”

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