« The economics of hybrid vehicles | Main | Will overseas investors cash in? »

December 10, 2007

Will $100 oil spark a recession?

There seems to be no end in sight to rising oil prices, which are now impacting the cost of driving. With prices at the pump rising to above $3 a gallon, is this the final straw that will push the economy into a recession? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's certainly not helpful, but right now we have got two big negatives in the economy. The biggest negative is the imbalance in the housing market and the related problems in the credit and mortgage market. These problems are reducing economic growth; economists estimate by 1.5 percentage points. Now, the latest increase in oil and gas prices is expected to shave another .3 percentage points off economic growth. So in total these two issues we have in the economy are causing the economy to decline (just those two factors) by about 2 percentage points, which means that if the rest of the economy, outside of these two problems, is growing at say 3 percent, then we are still going to see the overall economy grow. Because you have 3 percent growth outside of these problems, you shave off roughly 2 percent due to the housing and oil situation; you are still left with the 1 percent growth.

"That is still very tepid, and in fact that is not high enough to prevent the unemployment rate from rising. And it also makes us vulnerable to some other shock or some other problem, a triple threat if you will, that would come and we're not expecting it. So the consensus view among economists right now is that the economy can withstand these two negatives as long as something else doesn't come down the road. We will, however, see slower growth, probably higher unemployment until, importantly, we get the balance in the housing market worked out. That's the big thing we have to see improve. The gas and oil prices are probably going to remain high, but if we can get that housing market situation settled, that will dramatically improve the prospects for the economy."

Posted by Dave at December 10, 2007 08:00 AM