Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 03-09-2011 04:45 PM

Oil Fears Could Be More Devastating Than Oil Prices

The fear of even higher oil prices is more of a threat to the economy today than oil prices at their current levels, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp for Morningstar.

As the price at the gas pump continues to creep higher, and turmoil in the Middle East continues to dominate news headlines, I'm checking in with Morningstar's Bob Johnson, director of economic analysis, for his take on the effect of oil prices on the economy.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So, let's put this in perspective first and get a sense of how much of the economy is related to oil in the U.S.?

Johnson: Well, let's talk about it just in term of oil usage in the United States--that's consumer, business, things that may be stored. We have approximately 7 billion barrels usage a year, and at $100 a barrel, that's about $700 billion a year. Compared to a GDP of about $1.4 trillion, that's 5%. So it's a significant number, but it isn't like it's half or three quarters.

Stipp: So, another important thing is that we do get a good amount supply from overseas, but it's not like it's all coming from overseas. So when people hear about disruption, and they worry about oil skyrocketing, there are some other countervailing forces there as well?

Johnson: Absolutely. About half of oil is produced in this country, and we import the other half of it. I was surprised by that; I was just talking to our oil analysts this morning, and they were telling me that the import percentage was at 50%. I would've guessed it was probably slightly higher than that. So obviously, that's money that flows back to the U.S. In other words, if gas or oil prices go up, money goes away from the consumer to the oil companies who may reinvest it in new shale projects and other new things--invest it back in the economy. It's not like it's all going overseas--wasted and disappeared.

Stipp: So, I want to get a sense about the components of the oil price right now. So we had been seeing it go up a bit even before some of the turmoil had happened overseas. So to what extend do you think that $105 or so, where oil is trading right now, is due to this premium because of fear about contagion and more turmoil in the Middle East versus where oil might be had the Middle East conflicts not happened?

Johnson: One way to think about that is, the world economy was in relative equilibrium in terms of oil, and we're producing and using about 85 million barrels per day of oil across the world, and supply and demand were pretty much in line. So now, when there is any type of a disruption that number tends to jump rather violently.

So we had been as low as $42 a barrel in terms of oil; we've been as high as $147 for a barrel of oil, and now we're right around $105. So we're clearly high. Where would it have been without the disruptions? My guess is around $90, because we'd seen it come up at the end of last year as economic growth kicked in. The more economic growth you have, the more oil you tend to use. So I would expect it would have been higher than say midyear last year, because the growth expectations have really come up rather dramatically. So $85-$90 a barrel oil make sense to me. Anything beyond that I believe has to do with threats in the Middle East.

Stipp: So there is a component of actual supply disruption that's occurred in Libya, but then there is also a component of that extra premium, that fear that turmoil might spread. Can you give a little sense on where those things might be falling in the price of oil?

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article