“Oil price shocks have led to US recessions in 1974-75, 1980, 1990, 2001 and 2008-2009. 3 of these were caused by Mid East political shocks,” notoriously bearish economist Nouriel Roubini wrote on his Twitter account at the end of February. Last Wednesday, he made another bold prediction: “If troubles spread to other countries such as Bahrain and Saudi Arabia, this could push oil prices up to $140 to $150 per barrel, which could trigger a double-dip recession in the periphery of Europe and the U.K.”
While the predicted oil price may seem shock-worthy, the correlation of oil prices and recession should not. As James Hamilton, an Economics Professor at the University of California, San Diego, wrote last year, rising oil prices are a potential retardant to economic recovery, both in the automotive sector as well as across consumer spending in general.
“I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending,” Hamilton wrote in a fascinating post on EconBrowser.com. “I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate.”
Hamilton wrote that statement when oil prices had just pushed past $90/barrel. Now, price per barrel is at its highest level in over two years, and Roubini, known for his gloom and doom predictions, says the tough ride is just beginning. According to Forbes’ Robert Lenzner, Roubini’s predicted price of $150/barrel could take 2% out of the U.S. GDP.
It seems that plenty of traders agree with Roubini’s bearish outlook. A chart published today by Bloomberg shows a sharp increase in traders buying call options on $200/barrel oil futures, which expire on May 17th.
When Roubini sat down with Steve Forbes in January, he made predictions about the future of the U.S. economy. Thus far, he has been proven wrong about his take on unemployment, which he stated would remain above 9%.
He also, however, predicted a U.S. GDP growth of 2.7% this year, below the consensus of 3.2%. If oil prices continue to rise and the U.S. economy responds negatively, Dr. Doom could find himself in the rare position of having been overly bullish.
