Oil prices have reached new highs in 2023, with benchmark Brent crude approaching $100 per barrel. This rise in oil prices has complicated the Federal Reserve’s efforts to reduce inflation ahead of the September policy meeting and has raised fears that a recession may be on the US horizon.
Historically, high energy costs have played a role in causing recessions in the U.S. Whenever oil prices have doubled in the past, such as in September 1990, February 2000, and June 2008, the economy was already or would soon enter a recession. This correlation between oil price spikes and recessions has been noted by Nicholas Colas, co-founder of DataTrek Research.
Colas explains that rising oil prices have a significant impact on household spending habits. When oil or gasoline prices rise sharply, households are forced to quickly reduce spending in other areas. The greater the increase in oil prices, the more likely a recession will occur. However, Colas points out that this time it could be different.
Previously, the US benchmark crude, West Texas Intermediate, hovered around $70 per barrel in May and June, so a rise to $140 per barrel would be necessary to trigger a potential recession. In March 2022, WTI reached a high of $123 per barrel after Russia’s invasion of Ukraine. Therefore, investors will need to see higher oil prices than last year’s geopolitical conflict to potentially induce a recession in the next 12 months.
Despite the recent rise in oil prices, Colas believes we are not yet close to a point where rising oil prices will cause a recession in the U.S. However, if WTI quickly rises above $100 a barrel and continuing to rise, capital markets might start to pay attention.
Oil analyst Edward Morse, global head of commodities research at Citigroup, warns that Brent could surpass $100 a barrel in the near term due to concerns about a supply shortage and geopolitical tensions. However, he believes higher prices are not sustainable in the long term due to faster supply growth compared to demand growth.
Overall, although the recent rise in oil prices is concerning, it is still unclear whether it will lead to a recession in the US. Developments in oil markets and geopolitical events should be closely monitored.
– US Energy Information Administration