Oil At $200 And A Two-Year Recession

The predictions of $200 oil have made it to the front page of The Wall Street Journal. They have been hanging around in less prominent places, but now they gain some further legitimacy. According to the paper, "Oil’s historic ascent from $100 to nearly $150 a barrel in just six months is lending weight to a far grimmer prediction: Crude could reach $200 a barrel by the end of the year." The Journal predicts this would push gas prices to $6 a gallon.

If gas goes that high, several industries will be toast. Airlines and auto companies are obvious. The bankruptcy courts will be filled to overflowing with their lawyers and creditors’ counsels. The result could be one of the largest restructuring in the recent history of the US economy. Where the capital will come from to do this is anyone’s guess.

The falling of the dominoes does not end there. Gas and oil prices at unprecedented levels may well push energy costs to 20% to 25% of the income of many middle class households. In regions where the weather gets particularly cold in the Winter, that number could go even higher. Consumer spending would be completely arrested. Retail sales would be damaged beyond all but the most negative predictions.

Any industry which relies on transportation, whether it is newspapers or forestry products, would face costs which could easily wipe out gross margins. The impact could be so profound that it could effect the way that some people get most of their daily news.

Oil at $200 would seize up the economy to the extent that virtually no industry would me immune. Fixing the problem could take a year, and, perhaps, much longer. The US has not seen anything like it and has no experience with remedies, which makes solving the trouble all the harder.

Douglas A. McIntyre