Oil has cracked $100 (U.S.) a barrel for the first time since the global economic implosion in 2008, sparking new fear that the crucial commodity will undercut the recovery around the world.
Oil – which has shot higher because of the uprising in Libya – threatens several important and fragile corners of the economy. Airlines are bracing for higher costs and worry that people will fly less, or not at all. As the price of gasoline rockets higher, it brings trouble to auto makers just as they regain their balance after multibillion-dollar bailouts.
More related to this story
* Gadhafi’s grip on Libya weakens as international condemnation rises
* Canada at $100 oil
* How do oil shocks cause recessions?
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A demonstrator holds a caricature of Libyan leader Gaddafi as he shouts slogans at rally in Tokyo
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Libya unrest hits world markets
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Foreigners in Libya
As vulnerable sectors are buffeted, the shock ripples through the rest of the economy: transportation industries from trucks to trains try to pass costs on to shippers, who then try to load the extra weight on consumers’ final bills.
“It’s a new and unwelcome risk,” said economist Douglas Porter of BMO Nesbitt Burns.
“Oil has a long and storied history of causing serious problems for the global economy, and the United States economy in particular. But it’s not the short-lived spikes – it’s the sustained periods of major increases.”
While Libya is a relatively small oil producer – it pumps only about two-thirds of Canada’s output – traders are concerned about other oil-rich countries descending into chaos and taps going dry. On Wednesday, the Libyan leader was preparing to make a final stand with his last remaining supporters as cities and towns around the capital were falling to opposition protesters and foreign countries scrambled to evacuate thousands of citizens.
The darkest forecasts are starting to factor in the ongoing civil unrest. An analyst at the brokerage Nomura on Wednesday said oil could leap past $200 a barrel if oil production in Libya and neighbouring Algeria was completely halted. The figure is far beyond oil’s peak near $150 in 2008. That price strained some sectors of the global economy, which compounded the subsequent financial crisis when bad housing loans nearly destroyed U.S. banks. All together, it led to recession.
A long period of high oil prices would sink the world’s economies and plunge the fragile global economy back into recession, said Nobuo Tanaka, chief of the International Energy Agency, a policy adviser to Western countries.
“If $100 continues through 2011 – we call it the oil burden – this will create the same level of crisis as in 2008,” Mr. Tanaka told Reuters in an interview.
The potential economic damage was clearly visible in the stock markets on Wednesday. Share prices plunged 7 per cent for United Continental airlines in the United States, and Air Canada stock fell 4 per cent. General Motors was down 3 per cent, and auto parts makers also lost ground.
In Canada, the average price of gasoline has climbed to $1.15 (Canadian) a litre, 10 per cent higher than a year ago, according to statistics compiled by Kent Marketing. The current price is also higher than at the same point in 2008, the year gasoline reached a record $1.40 a litre in the middle of July, peak driving season.
Beyond oil, food prices have also soared. The cost of staples such as wheat and corn is dangerously high, the World Bank said this week, particularly for poor countries. Economists in general are warning of a “twin commodity shock” that would force people in rich and poor countries to pay more for fuel and food and slash the kind of discretionary spending that has bolstered the economic recovery.
A Reuters tally suggested about 400,000 barrels of oil in Libya – a quarter of the country’s production – have been cut off. Saudi Arabia, the world’s No. 2 oil producer behind Russia, has tried to calm consumers, insisting it has enough oil in reserve to replace any lost production. Saudi Arabia produces about 8.3 million barrels a day now, with spare capacity of about four million barrels.
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