In late January, I envisioned several scenarios for oil prices -- the worst being that oil could more than double if Saudi Arabia, which produces 25% of the global oil supply, went the way of Egypt.

Since then, the popular uprisings have spread in deadly fashion to Libya, which has declared force majeure on oil contracts. Libya accounts for a mere 0.5% of U.S. imports -- although it's easier-to-refine so-called sweet crude, so this should have a limited effect on oil prices in the U.S. -- especially since Saudi Arabia could pump "an additional 1 million to 1.5 million barrels in a matter of days," according to Tom Kloza, chief oil analyst at the Oil Price Information Service, quoted in The New York Times.

But with oil nearing $100 a barrel, the question that must be concerning economic forecasters and politicians who depend on economic growth is this: How much will higher oil prices cut into economic growth? According to the International Monetary Fund, a $10-a-barrel increase in the price of oil reduces U.S. GDP growth by 0.5 percentage points. Based on that relationship, forecasters need to go back to the drawing board to estimate how much oil prices could rise, what that might mean for GDP growth and how policymakers ought to respond.

While the rising price of gasoline at the pump is the most visible economic effect of higher oil prices, the reality is that oil and its byproducts are a bigger part of the economy. Here, according to NPR, are some examples of that cascading economic effect:
  • Airlines are likely to add fuel surcharges to the price of tickets -- they've raised fares four times since the start of 2011, according to the New York Times, boosting the lowest ticket price 10% since last January.
  • Delivery companies such as Federal Express (FDX ) and UPS (UPS) are likely to raise rates.
  • Food prices will reflect the higher costs farmers incur to run their tractors and other equipment. Transport costs would also rise.
  • Plastic goods might increase in price, since plastic is derived from oil.
  • Crowding out -- since consumers' real incomes are already down 8.1% in the last decade, those higher prices will limit what consumers can spend elsewhere.
Three Possible Scenarios

Nobody knows what's going to happen with the price of oil, but here are three scenarios for oil and unleaded gasoline and the impact on 2011 GDP growth -- most recently forecast by the Federal Reserve to be between 3.4% and 3.9%.

Under the "optimistic scenario," the price of oil would drop back to $89 a barrel, where it was in December 2010 before unrest in the Middle East kicked off. This would cause the price of gasoline to decline to $3 a gallon and would lead to GDP growth of 4.1%, a roughly 0.5 percentage point increase.

The "most likely scenario" would result in the price of oil rising to $100 a barrel and the price of gasoline climbing to $3.50 a gallon due to ongoing instability in the Middle East, but with Saudi Arabia continuing to control its oil supply. This would cause a roughly 0.5 percentage point decline in U.S. GDP growth to 3.1%.

Under the "pessimistic scenario," crude would rise to $150 a barrel, and the price of gasoline would surge to $4.50 a gallon as political instability in Saudi Arabia caused a severe contraction in energy production. This would lead to a roughly 2.5-point decline in U.S. GDP growth, down to 1% for 2011.

With Saudi Arabia pouring more money -- including a recent $36 billion injection -- into its economy, it's no doubt hoping to forestall this worst-case scenario. Unfortunately, unexpected surprises have a habit of happening. But it's somewhat comforting to point out that a few months after oil hit $147 a barrel in 2008, it plunged as low as $33 a barrel as global demand plummeted in the wake of the financial crisis.

And that self-correcting market for oil gives me some hope that this pessimistic scenario, even if it does occur, won't last long.


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52 Comments

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rc808

What happens to the priceo f gas if the speculation in the oil and gas commodities is stopped. The top 10 banks are one of the reasons the price is so high and rising. The government has to raise the margin requirement or make the speculators take delivery and hold the oil and gas they are buying to make huge sums of money.

June 07 2011 at 4:53 PM Report abuse rate up rate down Reply
justthe2ofus

guess obama will get his cap and trade one way or another buy higher fuel prices.

May 18 2011 at 12:44 PM Report abuse rate up rate down Reply
smrokosz

Oil prices are rising b ecause our goverenment is holding us like puppets getting all they can and making the public suffer. They are raising prices while pay checks stay the same or lowered while they enjoy the good life. Now that prices are up I hope they enjoy the raise they give themselves....

May 14 2011 at 4:01 PM Report abuse +1 rate up rate down Reply
ishrppa

want to see how much we are getting screwed? Check and see how many billions in profits the different oil companies made in the last quarter - I guarentee their pockets are lined so heavily now they can't walk!!!

May 03 2011 at 2:16 PM Report abuse -1 rate up rate down Reply
Louis

Y don't we just drill for oil here, sell it and use the money we earn on research and the development of alternative energy/fuels? Not to mention help reduce our tremendous debt.....we will have to cut spending and raise taxes to get out of this.......don't you think....????

Not to mention that Most all of our manufacturing has either dried up or when off shore. This was the back bone of this country and now, what do we do to bolster income?
I sometime wonder if the US is as corrupted as most other countries with the exception of the fact that our government tell us they are corrupt1

May 02 2011 at 12:20 PM Report abuse rate up rate down Reply
tptm

We don't drill and tap these huge oil fields here in the USA , we havn't really retooled the auto industry to manufacture more fuel efficient cars. We need to offer an income tax reduction for those that purchase them. Why buy a car for 33 grand instead of 25 grand that only get a little better gas milage, no incentives.
Also we need to have a consumption tax across the board so that even the illegal aliens will help support the infrastructure of this county.
How many so called self employed people do cash deals with customers to save both some money, the goverment gets shorted to the tune of how many $$$ a year?
The welfare system in this country is feeding the same families over and over, where is job training and medical exams for people that say they cannot work.

April 22 2011 at 9:18 PM Report abuse rate up rate down Reply
snowgoers3

Just let me know why this goverment is allowing the speculators to raise the price of oil the way it has. There has been no disruption in the flow just the idea that it might happen. Vacations as we know it will end and all mom and pop resorts, camp grounds, diners and so on will go under. Maybe the President needs another vacation before he makes a decision

April 20 2011 at 4:33 PM Report abuse rate up rate down Reply
dgleason2010

How long will it take before the people in this country realize that were going down. Goverment is spending money we don't have
and goverment has become the major drain on all of us. They need to lower spending by 25% just for starters.

April 20 2011 at 4:17 PM Report abuse rate up rate down Reply
mad1216@aol.com

still high oil prices no one in our goverment can lead ,for heaven sakes take the bull by the horns!

April 18 2011 at 11:43 AM Report abuse rate up rate down Reply
stretch031991

We have the ability to use aternative ways to power our vehicles, our jobs and our homes. Most people have been "brain washed" into being oil dependant and are resisting any major changes in lifestyles!

April 17 2011 at 11:39 AM Report abuse rate up rate down Reply