US economic recovery could skid on oil: IHS

The spreading unrest in the Middle East's oil exporting countries could push crude prices higher, resulting in a huge blow to the U.S. economy which is otherwise looking good, according to an analyst.

The Middle East crisis has raised the specter of another oil shock and the recent lurch in prices reflect an actual supply interruption from Libya, IHS Global Insight's chief U.S. economist Nigel Gault said in a note on Tuesday.

Given that supply disruption does not spread beyond Libya, IHS assumes there will be a $10 risk premium on the oil price. What this means to the economy is that every $10 added to the oil price knocks about 0.2 percent off the current-year growth rate, says Gault.

A worst case involving disruption to Saudi production would take us to $200/barrel or higher, and would indeed derail the recovery, the analyst said.

The oil market will also take into account the possibility of more serious disruptions elsewhere in the region, he says.
Gault said the Middle East unrest, especially the escalating Libyan crisis, has come as a rude shock for the U.S. economy. The economy was looking good when Libya erupted, he wrote.

Most indicators show the economy carrying a good head of steam into the oil shock. Manufacturing is surging, with exports and capital equipment spending picking up rapidly.