$120 OIL: THE BREAKING POINT

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

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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