Oil shocks and recessions go together.
Spikes in the cost of crude were followed by economic downturns in the United States in each of the decades following the Second World War. Many of those price surges were related to geopolitical events such as the Iran-Iraq War.
It's little wonder then that the situation in Libya, a member of the Organization of the Petroleum Exporting Countries, is making many people nervous.
"More often than not, a spike like this is debilitating," said Peter Hall, chief economist at Export Development Canada in Ottawa. Economies can handle elevated oil prices if there's elevated demand to match.
With the United States, Europe and Japan struggling to find their feet after deep recessions, the global economy probably isn't strong enough to absorb a return to 2008's record prices of almost $150 (U.S.) a barrel.
For now, there's reason to be optimistic the worst case will be avoided. There's plenty of supply: 96 days of the world's total daily consumption, the most in a couple of decades, according to Mr. Hall. Saudi Arabia, which has spare supply of four to six million barrels a day, has indicated that it is ready to replace any lost production from Libya, which pumps about 1.6 million barrels a day.
Nor is the economy as weak as it was in 2008. Record oil prices certainly played a part in the Great Recession, but probably weren't as important as the collapse of the housing market and the bankruptcy of Lehman Brothers. China and other emerging markets are still growing at a good pace, buoying global trade. World industrial production is at a record.
That's not to say oil prices at $100 won't have an effect. To the extent that gasoline prices rise, consumption of other goods will suffer. "Anything that will affect demand will cause an economic slowdown," said John Curtis, a distinguished fellow at the Waterloo, Ont.-based Centre for International Governance Innovation. And if the unrest spreads to bigger producers such as Saudi Arabia, all bets are off. But unless that happens, the recovery probably will endure.
"While the current pace of price appreciation is unsustainable, the current level is not an economy killer, at least not in the current economic context," said Stéfane Marion, chief economist at National Bank Financial in Montreal.
Past oil spikes followed by U.S. recession
1. OPEC Embargo, 1973-1974
OPEC's Arab members stopped oil shipments to the United States and other allies of Israel, contributing to a 7.5-per-cent decline in global production. The U.S. economy contracted at an annual rate of 2.5 per cent between the first quarter of 1974 and the first quarter of 1975.
2. Revolution and War, 1978-1981
The Iranian revolution and Iraq's subsequent attack on its neighbour caused price spikes that contributed to two recessions. Iranian production declined the equivalent of 7 per cent of global output between October, 1978, and the Shah's flight to the U.S. in January, 1980, spurring U.S. recession in the first half of 1980. Iran was pumping oil at about half of prerevolutionary levels when Iraq invaded in September, 1980. The combined loss in supply from the two countries amounted to 6 per cent of the global total. The U.S. economy contracted at an annual rate of 1.5 per cent over the 12 months starting in the second quarter of 1981.
3. First Persian Gulf war, 1990-1991
Iraqi production was back at levels of the late 1970's when Saddam Hussein invaded Kuwait in August, 1990. The price of crude oil doubled within a few months as output equivalent to 9 per cent of the global total was lost. Saudi Arabia used its reserves to restore supplies by November. GDP declined at an annual rate of 0.1 per cent over the 12 months starting in the third quarter of 1990.
4. Demand Shock, 1999-2000
Oil prices were around $10 (U.S.) a barrel at the end of 1998, reflecting a lack of demand after the Asian financial crisis of the previous year. OPEC and other big producers such as Mexico and Norway agreed in March, 2009, to cut daily crude supply by 7 per cent to end a glut. The effects of the Asian crisis weren't as severe as anticipated, and demand rallied, forcing the U.S. to pressure Saudi Arabia and other producers to reopen the taps. The 10th U.S. recession since the Second World War began in March, 2001.
5. Supply Shock, 2007-2008
Oil prices surged independent of a major geopolitical event. Instability in Iraq and Nigeria played a role, but crude prices shot to a record of around $147 a barrel in July, 2008, mostly because supply failed to keep pace with the rise of China and other emerging market countries. Chinese demand alone increased by 840,000 barrels a day between 2005 and 2007, yet global production actually tumbled after 2008. GDP declined at a rate of 0.7 per cent between the fourth quarter of 2007 and the fourth quarter of 2008.
Sources: Historical Oil Shocks, James Hamilton; University of California, San Diego; Bloomberg.