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Page added on October 30, 2007

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Recession risk rises with record oil

NEW YORK ( — There was a time when economists predicted that $60-a-barrel oil would cause a recession. Then they said $70 oil would. Then $80.

So it might be tough to take the recession threat of $90 a barrel oil very seriously. But some economists say that would be a mistake. They note that the current record-high oil prices are hitting when the economy is at its most vulnerable point in years – with the housing downturn, credit crunch and sliding value of the dollar posing threats that weren’t present when oil passed its previous benchmarks.
“The whole game has changed,” said John Silvia chief economist of Wachovia. “If they’re sustained here, going into the holiday season, you’re going to have a pretty horrendous fourth quarter.”

Silvia said the downturn in housing and the problems in credit markets that hit in August have left the employment picture significantly weaker than it was six or nine months ago, when oil prices took gasoline prices into record territory.

“The background is totally different now than it was in the spring,” he said. “The ability of the system to respond just isn’t as great as it was then.”

Still, Silvia says there slightly less than a 50-50 chance of a recession in the coming months, even if oil prices don’t ease up. He said he expects that the Federal Reserve will step up its rate-cutting efforts and go beyond the quarter-point cut he is expecting from the central bank on Wednesday.

David Wyss, chief economist with Standard & Poor’s, puts the chance of a recession at less than 50 percent. But he agrees with Silvia that the risks are greater with the combination of increased oil prices and the current weakness in other parts of the economy.

CNN Money

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