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Oil spikes may spur US recession: S&P

The credit rating agency says a further spike in oil prices could drag an already slowing U.S. economy into recession.

india Updated: Aug 07, 2006 20:20 IST

A further spike in oil prices resulting from a broader Middle East conflict would drag an already slowing U.S. economy into recession more easily now than a year ago, Standard & Poor's said on Monday.

The credit ratings agency said it believes the war between Israel and Lebanon-based Hizbollah will be contained, allowing oil prices to retreat. But it also forecast three alternative scenarios -- with a $250 oil barrel sparking global recession in the worst of them.

The most likely scenario, based on a limited Middle East conflict, has oil prices falling from their current level of around $75 a barrel to below $70 by year-end and to $60 by the end of 2008, S&P said.

That would allow the world economy to keep expanding, with U.S. economic growth slowing to 2.5 percent in 2007, Europe speeding up this year and Asia remaining solid, S&P's chief economist David Wyss wrote in the report.

But the ratings agency said a nightmare scenario could emerge should Iran close the Strait of Hormuz, a bottleneck in the Gulf region between Iran and Oman by which oil tankers from Kuwait, Saudi Arabia and the United Arab Emirates transit.

"World supplies would be cut by about 20 percent," Wyss said, forecasting that global strategic petroleum reserves would be tapped extensively, without avoiding a world recession "on the order of the 1980-1982 downturn."

In an intermediate S&P scenario, Iran would shut its taps, taking its daily 2.7 million barrels of oil exports off the market. According to the ratings agency, that could be Iran's response to a strike on its nuclear facilities or a retaliation against the US support of Israel.

In such a scenario, oil would probably soar to above $100 a barrel temporarily, settling near $95 a little later and beginning to decline near the end of the next year, when Iran would presumably return to the market.

The impact on the U.S. economy, however, would still be "substantial, with a near-recession starting in the fourth quarter and continuing through mid-2007," S&P said.

Iran warned last week that global oil prices could hit $200 per barrel if the United States pursued international sanctions against the country.

An oil embargo against the United States by Iran and other Arab nations would be another possibility, although a less harmful one, even if Venezuela decided to join it.

"The embargo will prove leaky because once oil flows onto the ocean, it will go wherever the money is. Also, we would expect most of the embargoing countries to be reluctant to enforce the ban strictly," said S&P's economist.

He forecast that, in such situation, oil prices could peak above $90 a barrel for a short while, quickly coming back to lower levels, with only a small price differential in the longer run.

First Published: Aug 07, 2006 15:05 IST