Like most commodities, crude oil is subject to extreme boom and bust cycles. Adjusted for inflation, "black gold" costs about the same as in 1861.
Yet prices held fairly steady between 1900 and 1971, when the United States devalued its currency. Because oil is priced in dollars, the Organization of Petroleum Exporting Countries, the cartel that accounts for more than one-third of global output, responded by pricing its commodity relative to gold.
Combined with chronic geopolitical conflict in the Middle East, OPEC's move set in motion a period of extraordinary volatility in energy markets.
Since 1971, crude oil has risen by at least 90% over the previous 12 months on six occasions. Five of those price spikes triggered a recession.
So far, the price of Brent crude - the global benchmark - has soared by roughly 90% since March 2010, to a recent high of nearly $120 a barrel.
There is nothing magical about the 90% year-on-year threshold, but the short-term rate of increase - not necessarily the nominal price of oil - is what has the greatest impact on world economic growth.
Given enough time, economies adjust to most realities, however harsh.
But anyone who experienced the gas lines, double-digit inflation, high unemployment and severe recession that resulted from the 1973-'74 oil embargo will shudder at what can happen in a virtually worst-case scenario.
The October 1973 Yom Kippur War erupted when a coalition led by Egyptian and Syrian forces attacked Israel on two fronts. When OPEC turned off the spigot for five months in retaliation for American support of Israel, oil shot up nearly 300% from a year earlier. Amazingly, the U.S. went on daylight saving time in early January 1974 to save energy.
Still, the inflation-adjusted oil price in 1973-'74 was only about $50 a barrel, an amount that doubled during the next supply shock that began during the Iranian revolution in 1979.
Iraq's incursion into Kuwait during the summer of 1990 also pushed oil prices higher by about 90% compared to mid-1989. Along with the latent effects of a monetary tightening campaign by the Federal Reserve, Saddam Hussein's misadventure contributed to a brief U.S. recession.
The current run-up in oil is different from previous chapters in at least one important respect.
In the past, soaring prices were caused either by a supply shock - as in 1973, 1979, and 1990 - or a surge in demand, like that which accompanied the hyper-growth in China and other emerging markets in early 2008. At that time, oil hit its all-time nominal high of nearly $150 a barrel.
Currently, however, supply and demand factors both are at work.
On the demand side, world oil consumption is on the rise again as developed economies recover from the Great Recession. Meanwhile, reduced supplies from Libya, coupled with threats to production from crucial players like Iran and Saudi Arabia, have slapped a high-risk premium onto the oil price.
Fortunately, it takes much less energy to generate a dollar of output today than it did 20 or 30 years ago.
Still, gasoline pushing $4 a gallon along with austerity measures at the state and local level, an ailing housing sector and a fundamentally changed labor market could cause "stagflation lite" - an unpleasant, albeit milder, version of the truly hideous combination of slow growth and high inflation that tormented consumers for almost 15 years beginning in the late 1960s.
Two questions need to be answered in the months ahead: Will political turmoil take root in Saudi Arabia or Iran, and what will the Fed do if rising energy prices leak into inflationary expectations and the core inflation rate.
Now that's an action plot that would be worthy of a great novelist.source jsonline.com... For the latest updates PRESS CTR + D or visit Stock Market news Today
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