Oil-Supply Disruption Could Impact US and Global Economies

Although the U.S. economy has been able to absorb higher energy prices so far, it has become more sensitive to costlier oil now than it was a year ago, according to a report by Standard & Poor's.  The article, titled "Conflict In The Mideast: Four Oil Supply Scenarios," says that any major disruption on oil supplies could have an impact on the U.S. and global economy.

Standard & Poor's expects the economy to slow down to a 2.5% GDP growth pace in 2007 from an estimated 3.5% in 2006.  The falloff in U.S. growth means it takes a smaller shock to cause a recession than it did a year ago.  "Whether the current Mideast conflict causes a recession depends mostly on how big the impact on oil supplies and prices becomes," explained Standard & Poor's Chief Economist David Wyss. "But this is still highly uncertain.  At Standard & Poor's, we continue to believe that the most likely outcome is that cooler heads will eventually prevail and that oil prices will drop back from current peaks."

Standard & Poor's examined four different scenarios:

1. The conflict is contained.  The current fighting subsides and oil prices subside to $70/barrel by year-end.

2. Iran shuts its taps. The conflict spreads to Iran and stops exporting oil. However, the Strait of Hormuz, through which most Persian Gulf oil flows, remains open, and Arab states continue to export.

3. The Gulf goes dry.  Most Persian Gulf oil shipments are shut down for a period of six months before the vital shipping lane reopens.

4. The U.S. gets cut off.  The Persian Gulf countries join in a selective embargo of the U.S., refusing to export oil to the U.S. but continuing to supply it at similar volume to Asia, Europe, and other oil-importing regions.  Venezuela cooperates with the Arab embargo.