Oil ‘Choke Point’ Nears

As oil blasted to a new record above US$122 a barrel yesterday, a new report suggests a “choke point” of US$150 a barrel could slam growth in the United States and cause a rout in stocks similar to the early 1980s energy crunch.

The report from Bank Credit Analyst (BCA) in Montreal comes as crude touched a high of US$122.73 a barrel in New York and Goldman Sachs forecast prices could shoot to US$200 within the next two years, thereby joining the superbulls at CIBC World Markets in predicting the run is far from done.


“We’re getting pretty stretched,” said Chen Zhao, managing editor of global investment strategy at BCA.

“I don’t think it’s inflation yet but there’s a lot of cost pressure for corporations and oil-consuming countries.”

Mr. Zhao did a simulation to see how high oil prices would have to go to bring the total drag from interest rates and energy expenditures to levels last seen in 1981, when the U. S. economy was last facing a major energy crunch after the two oil shocks of the 1970s.

“Our calculations suggest that if both short-and long-term interest rates stay at current levels, crude prices must rise to around US$150 per barrel and stay there for at least two quarters in order to bring the total drag to 1981 levels,” Mr. Zhao said.

The real ugly scenario for the U. S. economy would be if both interest rates and oil prices rise over a short period, Mr. Zhao said. “That’s going to turn this [equity] rally into another tailspin.”

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