Will High Oil Prices Bring The Economy To Its Knees (Again)?

It’s beginning to feel a little like 2008.

That was the year that oil prices started rapidly rising in January, pulling gasoline prices up as well. By spring, the average gasoline price was over $3.50 a gallon. By July, it had eclipsed $4 as a barrel of oil hit $147.

The reason was hotly debated. While oil prices were bid up by commodities traders on the futures market, most of whom never took delivery of a drop of oil, traders insisted they weren’t the cause of the price rise. They were simply reacting, they said, to rising energy demand, caused by rapid economic growth, in the developing world.

But was there really that much demand? As it turned out, the U.S. and most of the rest of the world had already slipped into a recession by the time 2008 dawned, we just didn’t know it.

The Great Recession announced itself a few months later when Lehman Brothers filed for bankruptcy and the credit markets locked up two weeks later. The world has been working itself out of that hole for the last two years.

Now that the economy appears to have righted itself amid optimism that things are beginning to turn around. There’s even renewed talk of robust growth in China, India, Brazil and other developing economies.

Approaching $100 a barrel

And right on cue, oil and gasoline prices are back up again. Crude prices are approaching $100 a barrel and the average U.S. gasoline price was over $3 a gallon on Christmas Day.

Fatih Birol, chief economist for the International Energy Agency, told the Financial Times this week that rapidly rising energy prices are a threat to the economic recovery.

“Oil prices are entering a dangerous zone for the global economy,” he told the newspaper. “The oil import bills are becoming a threat to the economic recovery. This is a wake up call to the oil consuming countries and to oil producers.”

Oil prices have risen 30 percent since September and gasoline prices started rising at about the same time. Coincidentally, that was also around the time the Federal Reserve announced a second round of quantitative easing, meaning it was pumping more liquidity into the system.

Because that is expected to dilute the value of the dollar, commodities priced in dollars, like oil, began to rise. Even though the dollar has actually gained strength in recent weeks, oil prices haven’t gone down.

Motorists have been using more gasoline, despite its rising price. The U.S. Energy Information Administration says gasoline stockpiles on December 24 were sufficient to cover nearly 23 days of demand, the lowest level since early September.

Birol is urging oil producing countries, particularly OPEC members, to increase production in the short term to keep prices from going higher. Otherwise, he says, 2011 could mirror some of the worst parts of 2008.