The U.S. can handle $80 barrels of oil, after that it’s straight to recessionville.
This is according to an interesting analysis by Steven Kopits of Douglas Westwood Energy (via Energy Source.) He looked at recessions in the U.S. from the past 37 years, and found “oil played a central role” in each. Here’s his three takeaways for thinking about the ‘right’ price of oil to avoid recessions:
“Crude oil expenditures should not exceed 4% of GDP.” The economy grows when oil consumption expenditures as a per cent of GDP are in the range of 2-4%. Above 4%, the economy is crippled.
“Oil prices should not increase by more than 50% year-on-year.” When the price spikes by 50% on a y/y basis a recession follows.
“Oil price increases should not be so great that a potential demand adjustment should have to reach 0.8% of GDP on an annual basis, as shedding demand at this rate has generally been associated with recession.” In other words, we don’t want to slam on the brakes and throw the entire economy out of whack.
Koptis points out that we’re just $10 away from our breaking point with oil floating at $70 a barrel. To control volitility, he recommends implementation of a flexible tax on gas that raises the average price at the pump to $4.00 a gallon. That would induce just the right amount of behaviour change.
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