One of the quickest ways to bring down the U.S. economy would be to dramatically increase the price of oil. Oil is the lifeblood of our economic system. Without it, our entire economy would come to a grinding halt. Almost every type of economic activity in this country depends on oil, and even a small rise in the price of oil can have a dramatic impact on economic growth. That is why so many economists are incredibly alarmed about what is happening in the Middle East right now. The revolution in Libya caused the price of WTI crude to soar more than 7 dollars on Tuesday alone. It closed at $93.57 on Tuesday and Brent crude actually hit $108.57 a barrel before settling back to $105.78 at the end of the day. Some analysts are warning that we could even see 5 dollar gas in the United States by the end of the year if rioting spreads to other oil producing nations such as Saudi Arabia. With the Middle East in such a state of chaos right now it is hard to know exactly what is going to happen, but almost everyone agrees that if oil prices continue to rise at a rapid pace over the next several months it is going to have a devastating impact on economic growth all over the globe.
Right now the eyes of the world are on Libya. Libya is the 17th largest oil producer on the globe and it has the biggest proven oil reserves on the continent of Africa.
Libya only produces 2 percent of the oil in the world, but with global supplies so tight at the moment even a minor production disruption can have a dramatic impact on the price of oil.
Before this crisis, Libya was producing approximately 1.6 million barrels of oil per day. Now the rest of the world is wondering what may happen if revolution spreads to other major oil producing nations such as Kuwait (2.5 million barrels of oil per day) or Saudi Arabia.
Saudi Arabia produces 8.4 million barrels of oil a day. It produces more oil than anyone else in OPEC.
If revolution strikes in Saudi Arabia and a major production disruption happens it could be catastrophic for the global economy.
David Rosenberg, the chief economist at Gluskin Sheff & Associates, is warning that if there is major civil unrest in Saudi Arabia we could end up seeing oil go up to $200 a barrel....
"If Libya can spark a $10-a-barrel response, imagine what a similar uprising in Saudi Arabia could unleash. Do the math: we'd be talking about $200 oil."
200 dollar oil?
Don't laugh - it could happen.
In fact, if it does happen the global economy would probably go into cardiac arrest.
The truth is that if the flow of oil from Saudi Arabia gets disrupted there is not enough spare capacity from the rest of the globe to make up for it.
Paul Horsnell, the head of oil research at Barclays Capital, recently said that the world does not currently have enough spare capacity to be able to guarantee that an oil "price shock" will not happen....
"The world has only 4.5m barrels-per-day (bpd) of spare capacity, which is not comfortable."
Horsnell also said that even in the midst of potential supply problems, the global demand for oil continues to grow at a very robust pace....
"In just two years, the world has grown so fast as to consume additional volume equal to the output of Iraq and Kuwait combined."
For now, Saudi officials are saying all the right things. They say that there will be no revolution in Saudi Arabia and that there are not going to be any supply problems.
For example, Saudi Arabian Oil Minister Ali al-Naimi recently announced that the rest of the world should not worry because his country is definitely going to be able to make up for any shortage in the global supply of oil....
"What I would like you to convey to the market: right now there is absolutely no shortage of supply."
But what happens if revolution comes to Saudi Arabia?
Suddenly the whole game would change.
But even with a peaceful Saudi Arabia the price of gasoline in the United States is already rising to alarming levels.
The average price of gasoline in the United States reached $3.14 a gallon last week. This closely mirrors what happened back in 2008. Three years ago at this time the average price of gasoline was right around $3.13 a gallon.
Let's certainly hope that we don't see a repeat of what happened to oil prices back in mid-2008. The price of oil reached an all-time record of $147 a barrel and gas prices in the United States absolutely skyrocketed.
So how high will the price of gas in the U.S. go in 2011?
We haven't even come close to 4 dollar gas yet, but a large number of analysts believe that it is coming this summer.
Is there even a possibility that we could see 5 dollar gas in America at some point in the next couple of years?
Well, there are some in the oil industry that are convinced that it could actually happen. Just consider the following quotes....
Darin Newsom, senior analyst at energy tracker DTN....
"If this thing escalates and there's a good chance that there'd be a shift in supplies, $5 gas isn't out of the question."
Peter Beutel, president of energy adviser Cameron Hanover....
"If you are looking at the disruption of movement and production in countries such as Saudi Arabia and the UAE, you're easily talking $5 gas."
John Hofmeister, the former president of Shell Oil, on his belief that we could see 5 dollar gas by 2012....
"I'm predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices."
So why is everyone so concerned about gas prices?
Well, because it affects the price of almost everything else in the economy.
David Wyss, the chief economist at Standard & Poor's, says that every extra dollar that is spent on gasoline is a dollar that will not be spent somewhere else....
"The money that you spend filling up your car is money you don't have to spend at the shopping mall."
Not only that, but when gasoline costs more it has a negative effect on economic growth. Almost all economic activities involve the use of oil in one form or another. When the price of oil starts getting really high it motivates people to start cutting back on many of those activities.
The truth is that our whole economic system is based on the ability to use massive amounts of very cheap oil. Now that the price of oil is rapidly rising again, many economists are becoming very alarmed.
Nobuo Tanaka, the Executive Director of the International Energy Agency, recently told CNBC that his organization is extremely concerned about what high oil prices could do to the global economy....
"That is our concern, regardless of the margins of disruption, if the $100 per barrel of oil is continued in 2011, the burden of oil to the global economy is as bad as 2008."
So what was so bad about 2008? Well, the price of oil soared to $147 a barrel in mid-2008 and this was a huge factor in the financial collapse that happened a few months later. Now oil prices are returning to levels that we have not seen since 2008....
So if the price of oil breaks the all-time record this year will we see another global financial crisis?
It is hard to say. But what almost everyone agrees on is that it will not be good for the global economy at all.
In addition, a higher price for oil will also have a huge impact on the trade deficit. Because oil prices were at such a high level back in 2008, oil imports actually made up almost 50 percent of the U.S. trade deficit that year.
In 2010, the U.S. trade deficit was just a whisker under $500 billion. If the price of oil gets up to 140 or 150 dollars a barrel we could easily see the U.S. trade deficit explode to 700 or 800 billion dollars in 2011.
That would be really, really bad for the U.S. economy.
So where are oil prices going next?
Well, if you could predict that with 100 percent certainty you could make a whole lot of money. Nobody knows for sure.
But almost everyone believes that the price of oil is going to go up. In fact, a lot number of investors have been making some very large bets that the price of oil is going to go up very significantly this year.
Recently, large numbers of investors have been betting that the price of oil will rise to $125 a barrel by May. Shockingly, some investors have even been betting that the price of oil will rise to $250 a barrel by next December.
Let us hope that the price of oil does not rise that rapidly, but as the past couple of months have demonstrated, the world is becoming a very unstable place. Just about anything is possible at this point.
If the price of oil rises significantly above $100 a barrel and it stays there for an extended period of time, it is going to be absolutely devastating for the U.S. economy.
So what do you all think is going to happen to the price of oil in 2011? Please feel free to leave a comment with your thoughts below....