NATHAN VANDERKLIPPE, CARRIE TAIT – The Globe and Mail
As markets hold oil prices above $110 (U.S.) a barrel, they are pushing the global economy back to a brink it fell from just three years ago, the last time crude rose to such lofty heights.
This time, consumers have largely absorbed the hard-charging price of oil, which has risen solidly into triple-digit territory in the wake of turmoil in North Africa and the Middle East. But economists say prices are now within $10 or $20 from levels that will spark serious negative effects.
That worry has been worsened by expectations that, unlike oil’s brief rush and plunge from its heights a few years ago, high prices are now broadly expected to stick.
Economists believe oil companies, consumers and the global economy will be able to tolerate oil at around $110 a barrel over the next year or two – and even as they start to feel the pinch of higher prices, any drop will come slowly. It takes time for consumers to change their habits in a way that has a meaningful effect on demand. And while governments may try to legislate their way off oil, it takes years for policies to make a difference.
But even if the price of oil is sustainable at $110 a barrel, anything beyond that threshold will prompt a swifter reaction.
“What we don’t want to see is oil prices spiking any higher. It’s going to end badly,” Todd Hirsch, senior economist at ATB Financial, said on Monday.
The world has seen that particular story before, and memories of the crash that followed the 2008 spike are still fresh.
But even $110 a barrel may be enough to cause pain, and a reaction from lawmakers.
“The full effect of [the current price of oil] has not yet been felt, and it is going to have an impact, and there is going to be a demand response. Consumption will start to be impaired,” said Peter Tertzakian, chief energy economist at ARC Financial Corp. “It is a story that is going to play out over the course of the next year.”
Even when oil cruised past $85 a barrel in 2008, the push for alternative forms of energy jumped, Mr. Tertzakian noted. But because there is no immediate replacement for crude, the current price will remain viable over the next two years. However, any steep gains will mean immediate changes.
“Anything higher than this, you’re going to start to see changes occurring faster. The higher it goes, the faster it is going to come down,” he said.
Investors were frightened when the price of oil crossed the $100-a-barrel mark in 2008, believing record prices would prompt consumers to change their lifestyle. This time, however, the market has stayed calm, accepting that $115 a barrel may be the high end of what companies, consumers and governments will accept.
Some in the oil patch remain confident that high oil prices are here to stay – and will propel greater spending. They could also hasten a return to some of the problems from the last boom, which prompted huge labour shortages.
“There is a worldwide scarcity of oil that’s available today, and with demand growing, there’s probably plenty of reason that prices ought to be going up,” said Anthony Marino, chief executive officer of Baytex Energy Corp.
If prices do remain strong, it’s all but inevitable that drilling and development activity will increase, Mr. Marino said.
Yet it seems clear that as crude prices climb higher into the triple digits, they are doing some damage. Consumer confidence is beginning to lose strength in Canada. It is showing greater weakness in the U.S., where recent data are already beginning to show declines in retail fuel purchases as $110 oil pushes up pump prices.
“Now is that enough to knock the U.S. recovery off its bicycle? I don’t think so. But it does begin to clip growth at these kind of levels,” said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
Economists generally use two rules of thumb when it comes to calculating crude price impacts. Every $10 rise in a barrel raises pump prices in Canada by 7 cents a litre. And each additional $10 on the oil price chokes global recovery by about two-tenths of a per cent.
That is less true, however, for Canada, where crude production is such an important economic contributor that rising prices are actually slightly positive for growth – but only to a point. At roughly $125 a barrel, “it tips over into being a weight on the Canadian economy,” Mr. Porter said.
At that price, he said, the damage to the U.S. economy is so great that it begins to hurt Canada.
“When you start getting above $125 or so, it becomes a serious enough damper on the U.S. economy that whatever positives we get here in Canada are outweighed,” he said.