What Does $120 Oil Mean for the Global Economy?

The Oil Drum ^ | May 11, 2008 | Chris Vernon

[freerepublic_or_die]

Note:I took literary license to post this as "What Does $120 Oil Mean for the Global Economy? from What Would $120 Oil Mean for the Global Economy?

The pdf is a short report written by Robert F. Wescott and published in April 2006 by Securing America’s Future Energy. It was written when oil was ~$60 a barrel and addressed a scenario where the price of oil surged to $120 due to coordinated terrorist attacks on global oil transport infrastructure. Well, here we are, two years on at $120 oil (without the attacks) so it’s worth revisiting the analysis in light of the conclusion:

The main conclusion of this note is that $120 oil would have profound negative effects on the world economy and global financial markets. ... Such oil prices would almost certainly precipitate a global recession.

The scenario is not identical to the present situation, Wescott’s terrorism induced $120 involves a rapid spike upwards however the analysis is based on the $120 price being sustained for a year. This long term high price is similar to today’s situation.

The most interesting chart from the report shows world oil expenditure as a percentage of world GDP

Wescott points out that historically this metric has been in the range of 1-3% and recessions have occurred when the expenditure exceeded 4%. $120 represents approximately 8% of world GDP, higher than at any time in modern history. Two studies are cited: The International Monetary Fund (IMF) suggesting a $5 increase cuts world GDP by 0.3% so it follows that the $60 to $120 doubling would reduce world GDP by 3.6% and the US Federal Reserve estimates that a $20 increase reduces GDP by 0.75%, which would result in a loss of 2.3% from increase $120.

[RightWhale]

No doubt not helping the situation, but the True Cause lies elsewhere.