Will Oil Prices Prevent a Recovery?

The rise in oil prices does not seem to be consistent with the overall weakness of the world economy, but there are several reasons why it just may be sustained or extended, even in the absence of a global economic rebound.

The third reason is that the looming danger of peak oil has not gone away, it has only been masked by “peak demand” caused by the economic downturn worldwide. Any incremental oil is now coming from very expensive sources like the Canadian oil sands or the very deep waters of Brazil, both of which require oil prices in the mid-$60’s to be economically viable.
With oil prices rising above those levels, the drilling off Brazil should pick up steam. There are, however, very few rigs capable of drilling at such depths. Most of those are controlled by two firms, Transocean (RIG – Analyst Report) and Diamond Offshore (DO – Analyst Report), both of which will benefit enormously if oil prices stay high.

In short, the current levels of oil prices are not exactly fertilizer for the “green shoots,” but will not kill them off either. Other developments, such as long-term interest rates, will have more of an impact. The very low prices a the pump in the first quarter may have been one of the key reasons why consumer spending in the quarter was higher than expected (but probably not as big a factor as increases in transfer payments). However, if they continue to rise towards the $100 level, the world economy could easily fall back into the abyss.

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