Global Economics

Seven Consequences of $100 Oil


Turmoil in the Middle East. Violence in Nigeria. Surging demand from China. Due to these factors and several others, there's plenty of speculation these days that oil will reach the once unimaginable level of $100 per barrel. (see BusinessWeek.com, 7/27/07, "Would $100 Oil Slam the World Economy?") Will that happen? It's far from certain. Even if it does, it may not be in the near future. Still, given the increasing possibility that oil will hit triple digits, here's a look at some of the possible consequences:

HMMM… MAYBE I'LL WALK TO WAL-MART. IT'S ONLY FIVE MILES

Wal-Mart Stores (WMT), the irresistible force, collides with oil, the immovable object. While the wealthy barely notice high oil prices, Wal-Mart's customers feel plenty of pain at the pump. Even at $75 per barrel, Wal-Mart execs say they have noticed customers tightening up.

THE NEW HUMMER 4: SMALLER THAN A MINI COOPER!

GM's (GM) nascent recovery is threatened as SUV sales and profits take another hit. Ford (F) is possibly pushed toward a financial crisis. Might $100 oil also push GM into an alliance with Renault and Nissan (NSANF.PK)? Maybe. But that mash-up concept has less to do with oil than with a struggle for control between GM chief Rick Wagoner and Kirk Kerkorian, the activist investor.

BEN BERNANKE LOSES MORE HAIR

Poor Ben Bernanke. Alan Greenspan's successor as chairman of the Federal Reserve is stuck with two undesirable choices. He can raise rates to quell the inflation that's creeping into the economy from costly oil. Or he can cut rates to keep the economy healthy in spite of the hit to consumers who are sending their paychecks overseas to pay for gasoline. Unfortunately, he can't do both at once.

REMEMBER WHEN CORN AND SUGAR WERE CONSIDERED FOOD?

Corn flakes cost more because corn farmers are feeding their corn into distilleries for ethanol. Same goes for the prices of cola and candy, which are made with sugar—a favored ingredient for ethanol. For the first time, the auto and the kitchen are competing for the same resources.

AH, THE JOY OF MONEY FALLING LIKE SNOWFLAKES IN A BLIZZARD

Rex Tillerson of ExxonMobil (XOM) begins to get really, really rich. Tillerson wasn't as highly paid as No. 2 at ExxonMobil, but now that he is CEO he is likely to get deluged with the dollars that fall on an oil executive who happens to be in the boss's chair when oil prices go nuts. Same for David O'Reilly of Chevron (CVX), James Mulva of ConocoPhillips (COP), and the other fortunate ones.

FILL 'ER UP, SIR? HEZBOLLAH THANKS YOU.

Israelis spend more time in bomb shelters. The higher price of oil pumps more money into Iran, giving it the wherewithal to fund its Lebanon-based proxy army, Hezbollah. High oil prices may also further destabilize Iraq by upping the stakes for the warring parties.

GUESS WHAT? $100 OIL SUDDENLY DOESN'T SEEM ALL THAT EXPENSIVE

Gasoline soars all the way to… $3.70 a gallon. Surprised it's not more than that? Do the math: There are 42 gallons in a barrel, so an extra $25 a barrel is only an extra 60 cents' worth of oil per gallon of gas. To get to $5 a gallon—possible, but a long shot—you'd have to also have an enormous spike in refiners' profit margins. Oil at $100 is not enough to cause a recession, though it could lower 2007 economic growth to around 1% instead of 2.5%, figures Standard & Poor's Chief Economist David Wyss. "The economy has changed enough so $100 oil, while certainly not nice, is not a disaster," says Wyss.

Turmoil in the Middle East. Violence in Nigeria. Surging demand from China. Due to these factors and several others, there's plenty of speculation these days that oil will reach the once unimaginable level of $100 per barrel. (see BusinessWeek.com, 7/27/07, "Would $100 Oil Slam the World Economy?") Will that happen? It's far from certain. Even if it does, it may not be in the near future. Still, given the increasing possibility that oil will hit triple digits, here's a look at some of the possible consequences:

HMMM… MAYBE I'LL WALK TO WAL-MART. IT'S ONLY FIVE MILES

Wal-Mart Stores (WMT), the irresistible force, collides with oil, the immovable object. While the wealthy barely notice high oil prices, Wal-Mart's customers feel plenty of pain at the pump. Even at $75 per barrel, Wal-Mart execs say they have noticed customers tightening up.

THE NEW HUMMER 4: SMALLER THAN A MINI COOPER!

GM's (GM) nascent recovery is threatened as SUV sales and profits take another hit. Ford (F) is possibly pushed toward a financial crisis. Might $100 oil also push GM into an alliance with Renault and Nissan (NSANF.PK)? Maybe. But that mash-up concept has less to do with oil than with a struggle for control between GM chief Rick Wagoner and Kirk Kerkorian, the activist investor.

BEN BERNANKE LOSES MORE HAIR

Poor Ben Bernanke. Alan Greenspan's successor as chairman of the Federal Reserve is stuck with two undesirable choices. He can raise rates to quell the inflation that's creeping into the economy from costly oil. Or he can cut rates to keep the economy healthy in spite of the hit to consumers who are sending their paychecks overseas to pay for gasoline. Unfortunately, he can't do both at once.

REMEMBER WHEN CORN AND SUGAR WERE CONSIDERED FOOD?

Corn flakes cost more because corn farmers are feeding their corn into distilleries for ethanol. Same goes for the prices of cola and candy, which are made with sugar—a favored ingredient for ethanol. For the first time, the auto and the kitchen are competing for the same resources.

AH, THE JOY OF MONEY FALLING LIKE SNOWFLAKES IN A BLIZZARD

Rex Tillerson of ExxonMobil (XOM) begins to get really, really rich. Tillerson wasn't as highly paid as No. 2 at ExxonMobil, but now that he is CEO he is likely to get deluged with the dollars that fall on an oil executive who happens to be in the boss's chair when oil prices go nuts. Same for David O'Reilly of Chevron (CVX), James Mulva of ConocoPhillips (COP), and the other fortunate ones.

FILL 'ER UP, SIR? HEZBOLLAH THANKS YOU.

Israelis spend more time in bomb shelters. The higher price of oil pumps more money into Iran, giving it the wherewithal to fund its Lebanon-based proxy army, Hezbollah. High oil prices may also further destabilize Iraq by upping the stakes for the warring parties.

GUESS WHAT? $100 OIL SUDDENLY DOESN'T SEEM ALL THAT EXPENSIVE

Gasoline soars all the way to… $3.70 a gallon. Surprised it's not more than that? Do the math: There are 42 gallons in a barrel, so an extra $25 a barrel is only an extra 60 cents' worth of oil per gallon of gas. To get to $5 a gallon—possible, but a long shot—you'd have to also have an enormous spike in refiners' profit margins. Oil at $100 is not enough to cause a recession, though it could lower 2007 economic growth to around 1% instead of 2.5%, figures Standard & Poor's Chief Economist David Wyss. "The economy has changed enough so $100 oil, while certainly not nice, is not a disaster," says Wyss.

Turmoil in the Middle East. Violence in Nigeria. Surging demand from China. Due to these factors and several others, there's plenty of speculation these days that oil will reach the once unimaginable level of $100 per barrel. (see BusinessWeek.com, 7/27/07, "Would $100 Oil Slam the World Economy?") Will that happen? It's far from certain. Even if it does, it may not be in the near future. Still, given the increasing possibility that oil will hit triple digits, here's a look at some of the possible consequences:

HMMM… MAYBE I'LL WALK TO WAL-MART. IT'S ONLY FIVE MILES

Wal-Mart Stores (WMT), the irresistible force, collides with oil, the immovable object. While the wealthy barely notice high oil prices, Wal-Mart's customers feel plenty of pain at the pump. Even at $75 per barrel, Wal-Mart execs say they have noticed customers tightening up.

THE NEW HUMMER 4: SMALLER THAN A MINI COOPER!

GM's (GM) nascent recovery is threatened as SUV sales and profits take another hit. Ford (F) is possibly pushed toward a financial crisis. Might $100 oil also push GM into an alliance with Renault and Nissan (NSANF.PK)? Maybe. But that mash-up concept has less to do with oil than with a struggle for control between GM chief Rick Wagoner and Kirk Kerkorian, the activist investor.

BEN BERNANKE LOSES MORE HAIR

Poor Ben Bernanke. Alan Greenspan's successor as chairman of the Federal Reserve is stuck with two undesirable choices. He can raise rates to quell the inflation that's creeping into the economy from costly oil. Or he can cut rates to keep the economy healthy in spite of the hit to consumers who are sending their paychecks overseas to pay for gasoline. Unfortunately, he can't do both at once.

REMEMBER WHEN CORN AND SUGAR WERE CONSIDERED FOOD?

Corn flakes cost more because corn farmers are feeding their corn into distilleries for ethanol. Same goes for the prices of cola and candy, which are made with sugar—a favored ingredient for ethanol. For the first time, the auto and the kitchen are competing for the same resources.

AH, THE JOY OF MONEY FALLING LIKE SNOWFLAKES IN A BLIZZARD

Rex Tillerson of ExxonMobil (XOM) begins to get really, really rich. Tillerson wasn't as highly paid as No. 2 at ExxonMobil, but now that he is CEO he is likely to get deluged with the dollars that fall on an oil executive who happens to be in the boss's chair when oil prices go nuts. Same for David O'Reilly of Chevron (CVX), James Mulva of ConocoPhillips (COP), and the other fortunate ones.

FILL 'ER UP, SIR? HEZBOLLAH THANKS YOU.

Israelis spend more time in bomb shelters. The higher price of oil pumps more money into Iran, giving it the wherewithal to fund its Lebanon-based proxy army, Hezbollah. High oil prices may also further destabilize Iraq by upping the stakes for the warring parties.

GUESS WHAT? $100 OIL SUDDENLY DOESN'T SEEM ALL THAT EXPENSIVE

Gasoline soars all the way to… $3.70 a gallon. Surprised it's not more than that? Do the math: There are 42 gallons in a barrel, so an extra $25 a barrel is only an extra 60 cents' worth of oil per gallon of gas. To get to $5 a gallon—possible, but a long shot—you'd have to also have an enormous spike in refiners' profit margins. Oil at $100 is not enough to cause a recession, though it could lower 2007 economic growth to around 1% instead of 2.5%, figures Standard & Poor's Chief Economist David Wyss. "The economy has changed enough so $100 oil, while certainly not nice, is not a disaster," says Wyss.


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