At What Point Do Oil Prices Trigger a US Recession?

The United States could see a recession if rapidly rising oil prices hit a crucial tipping point, economists have warned. Oil prices are surging worldwide, and the conflict in Ukraine has exacerbated numerous factors that have already caused record price hikes.

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Bernard Baumohl, chief economist at The Economic Outlook Group, said that if U.S. gasoline prices hit US$4.75 per gallon on a national level, that's the point at which the U.S. would see a change in consumer behavior - such as citizens significantly cutting their air and auto travel.

That could increase the odds of a recession, said Baumohl, who was ranked by The Wall Street Journal in 2019 as the most accurate economic forecaster in the previous year's economic survey. However, key is the length of time during which prices remain at the four-dollars-and-75-cents scenario.

The U.S. national average for a gallon of regular gasoline was US$4.237 on Wednesday, down 15.8 percent from a week ago, but still up nearly 20 percent from a month ago. A number of U.S. states have been scrambling to find a solution for the record price spike, with Georgia and Maryland suspending gas taxes in recent days.

While Baumohl's dominant scenario is that the Ukraine war will fizzle out in this year's second quarter, and that oil prices will drop consistently below US$100 per barrel. If the Ukraine war does not come to a halt in this year's second quarter, the U.S. is looking at a "totally different scenario" and at that point "we're looking at a much higher risk of a recession, because inflation pressures will only escalate, it will not subside," he said.

"So we would have something equivalent to 'stagflation' - high inflation and low economic growth," Baumohl said, while emphasizing that this is not his group's dominant scenario, which is based on the assumption that there will be no more major COVID-19 outbreaks that would trigger major lockdowns, such as those that occurred in spring 2020. It is also predicated on the assumption that the U.S. Federal Reserve does not get too aggressive in raising interest rates.

Andrew Lipow, president of Lipow Oil Associates, a consulting firm, said that the high price of diesel fuel is already having an impact on economies in Africa, South America, and Southeast Asia, which would also pose downside risks to the U.S. economy.

"If lots of countries are stretched on food and fuel, there's less money left over to buy consumer goods," Lipow said. "The lack of buying consumer goods can spill over into China, and if China slows down, we can ultimately be impacted (in the United States) as well. Economies around the world are connected, and you're seeing that happen right now," he pointed out.

High gas prices are particularly painful in a nation dependent on autos for the majority of travel, trips to the supermarket and to work. Gas price increases hurt low income individuals and families the most - especially those in rural areas who must commute long distances to work every day.

"We have yet to see any material demand destruction, even at these record prices, and we would probably need oil prices to go to about US$140 a barrel, and at that level I think a recession would be quite likely," Lipow said.

On Wednesday noon, the price of Brent crude stood at US$122 per barrel. The market is very concerned that there might be a significant production disruption with reduced Russian oil, at the same time that Organization of Petroleum Exporting Countries (OPEC) members have refused to utilize their spare capacity to make up for any Russian shortfall.

The U.S. government, however, has very few choices to mitigate the current situation. President Joe Biden on Monday met with several heads of major oil companies at the White House in a bid to discuss ways to cooperate against the backdrop of high oil prices. So far, no significant solutions have come from the meetings.