According to Merrill Lynch’s Sabine Schels, a commodity analyst, the breaking point for the global economy is when the size of the energy sector hits 9%.  With the sector currently at 7.8% Schels says the breaking point is $120 oil:

“Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis,” said Sabine Schels, a commodity analyst at Merrill Lynch.”It was in the 1980s and it was the same in 2008. Right now we are at about 7.8 percent and if you go above $100 per barrel to $120 per barrel, you get to that 9 percent level.”

With oil trading at roughly $92 today this leaves us with a 30% cushion according to this analysis, however, strains will increase if prices should continue to gravitate towards that level.

The IEA’s Chief Economist, Fatih Birol says the issue is already increasingly similar to 2008:

“The ratio of countries’ oil import bills to GDP, a key measure of the cost of oil prices on economies, is close to levels last seen during the financial crisis in 2008, Mr Birol warned.If oil prices remain above $90/barrel for the rest of this year then the ratio for the European Union will be 2.1 per cent – close to the 2.2 per cent level it reached in 2008.”

Either way, with oil prices very strong before the seasonally strong summer season there is a good chance that higher oil and gas prices will continue to pose a very serious risk to the global economy.  Ironically, a booming global economy might just be the fuel for oil and gas prices that tip the global economy back into malaise.  Will surging inflation in the emerging markets expose the underlying deflationary risks that persist in the developed world?


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • tradeking13

    A co-worker of mine just got back from a trip to India to visit his family. He said his uncle just sold his 7 year-old car with 150,000 kilometers on the odometer for more than he paid for it 7 years ago when it was new. Now that’s inflation!

  • JLM

    Roubini thought over a year ago that only $100 a barrel would sink the current ship. I like the idea of expressing energy costs as a percentage of the world economy, and the historical precedents given in this article. Have to love the Fed. They probably have no idea that QE1 was responsible for spiking oil to over $140 dollars a barrel and here they are at it again with QE2 and the economy is being pushed a second time right up to the tipping point. They are reckless!

  • rick

    u think the FED is being reckless? what makes you think this is not being done on purpose. The central bankers that control the FED have no allegiance whatsoever to the US. The FED serves only the will of the Small group of central bankers and they could give a crap about the US. That’s what we all need to realize, the people in power, that’s the FED not the elected government, do not have our best interests in mind when they do anything.
    Congress to Bernanke “where did the bailout money go” Bernanke to Congress “none of your business” Jesus people we are being robbed at gunpoint, the gun was the threat of martial law that went out to Congress. Congress caved, they should have had helicopter Ben thrown into jail but instead they acted in their own self interest and said “well do anything you want just don’t take away our money.