Will Higher Energy Costs Cause a Recession?
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First, I want to say I hope and pray for the fighting in Ukraine to come to an end. It’s a tragedy and I hope diplomacy can be reached without any more pain and suffering.
In my article back in November, gas was $3.49 a gallon and now we’re at $4.24 a gallon. Roughly a 3.5% increase since that time as West Texas Intermediate is now trading at $113.50 a barrel.
The question is: at what point does this crush consumers and the economy?
If energy prices surge to a total of 7% of GDP, for a period longer than a year, then a recession could be possible according to the analysts over at Bernstein. From the looks of it, energy prices are starting to approach levels of concern, which could cause a significant slowdown. Higher oil prices are like an additional tax on consumers, which hurts disposable income.
The U.S. currently produces about 11.5 million barrels of oil a day. This is roughly a 9.2% increase from 2021, which was around 10.6 million barrels of oil a day according to the recent Energy information Administration weekly data report. On the other hand, the U.S. is currently importing 3.9 million barrels a day, which is a 47.9% increase from 2021! If we look at the chart below, you can see most of the overall consumption for the United States is used for transportation purposes, which accounts for 66%.
Now, here come some interesting statistics. Mark Zandi, chief economist at Moody’s Analytics, noted that for “every penny increases in the cost of a gallon of gas costs U.S. consumers $1 billion”. According to Zandi, if gas prices hit $5.25, that’s a $200 billion hit to the economy, which is roughly 1% of overall GDP. While oil prices are on the rise, so are other commodities. This increase is causing further impacts to consumers. The War in Ukraine is making things significantly worse for the supply side as Russia produces 11% of global oil production. The table below gives us a great breakdown of the overall largest producers and consumers of oil globally. 12
Conclusion: If war rages in Eastern Europe and things deteriorate further, an oil price shock could tip the U.S. and global economy into recession.
Pray for the people of Ukraine.
Thanks for reading,
Korey
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