Could a spike in gas prices scare Americans into a recession?


The drone attack on Saudi Arabia oil fields came at a particularly vulnerable time for the U.S. and global economy.

Saudi authorities say drones attacked Saudi Aramco’s Abqaiq plant on Saturday. The plant is one of the world’s largest oil CL.1, -4.12%   processors, capable of churning out 5.7 million barrels of oil daily. Officials in the country said by Monday, they would resume one-third of the lost output.

“This type of uncertainty in the world oil market will make consumers more nervous than they are already,” said Professor Shanjun Li, an economist at Cornell University’s SC Johnson College of Business who has studied the links between gasoline prices and consumer behavior.

Companies could also be cautious about making investments, like expanding capacity and hiring more workers. Rising gas prices in the early 2000s, coming as they did on the back of the subprime mortgage crisis, contributed to the Great Recession, he said.

The average annual gallon price was $2.02 in 2000 and $3.61 in 2008, according to Energy Department figures. The federal statistics were adjusted for inflation in 2015. A gallon of gas currently costs $2.56 according to AAA’s national average price.

Previous research from the Federal Reserve said it can be tricky to know how much oil price shocks ignite a recession. Credit contractions and oil price increases usually happen around the same time, it said in a 2014 paper.

Don’t miss: Why Saudi Arabia’s output hit won’t lead to shocking prices at the gas pump

Whatever their big picture macroeconomic effect, gas prices can loom large for individual drivers. Rising gas prices can “lead to an immediate deterioration in subjective well-being,” said researchers looking self-reported life satisfaction from 1985 to 2005.

Consumers spent $2,109 on gas, motor oil and other fuels last year, up 10% since 2016, according to the Bureau of Labor Statistics. Oil prices surged Monday, with barrel prices up 14%, marking the steepest daily rise in more than 10 years.

UBS UBS, -1.47% Global Chief Investment Officer Mark Haefele said the attack was “yet another headwind for a global economy that is already buffeted by deteriorating manufacturing activity and elevated trade tensions.”

But he said increased gas prices alone would not be a strong enough factor to hasten a recession, which many economists expect to happen by Summer 2020. “We don’t believe that this short-term disruption to oil production will trigger a global recession,” he said.

Other market experts say the attack could seriously shake markets. But if Saudi officials get the facility back and running within a week, there shouldn’t be much bottom line impact on consumers, said Mihir Kapadia, CEO of Sun Global Investments, a London-based financial services firm.

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