With speculation calming, at least for the moment, oil prices are no longer soaring higher and higher every day. But prices are at a tipping point.
The days of $100 a barrel oil are back. Most economists think that this price level, while high by historical standards and an impediment to growth, is not high enough to completely derail the economic recovery. We are still below a national average price of $3.50 for regular gasoline, the price at which consumers are thought to get worried and rein in their discretionary spending. (The average national price is now $3.29 according to A.A.A., roughly 18 cents higher than a month ago.)
But if we go much higher, all bets are off. Spending on petroleum products is a relatively small fraction of the economy, but it carries psychological weight. And because petroleum products are tied to transportation costs, higher oil prices can spur inflation.
So what could send prices still higher?
It seems clear that Libya is going to be unstable for a while, which should prevent prices from going much lower. Its 1.5 million barrels a day in exports account for less than 2 percent of world output, but its high-quality crude is difficult to replace.
Still, Libya alone cannot bring about the kind of oil shock that would force American motorists to wait in long lines to fill up as they did in the 1970s. Refineries in the United States can handle sourer crudes, and Saudi Arabia is pumping more to fill the gap.
Supplies in the world are tight, but not as tight as they were in 2008, when oil prices soured to nearly $150 a barrel. That’s because demand in Europe and the United States is still soft, and the Saudis have more spare capacity. But demand in China and the developing world is growing. Thus the tipping point.
So the question remains whether the contagious rebellion that has spread from Tunisia to Egypt to Yemen to Bahrain will take any more production offline. Most of the countries suffering problems are not major oil producers. Saudi Arabia appears secure, for the time being.
The countries to watch in the region are Algeria and Bahrain. Algeria has a history of unrest and is the seventh leading foreign oil supplier to the United States. Despite large demonstrations in recent weeks, the government felt secure enough to abolish its emergency security law a few days ago. The military is relatively professional and cohesive, and some observers say the population may be frightened to return to the violent days of the 1990s.
Bahrain is not a major producer, but is only a 15-mile stretch of causeway away from some of Saudi Arabia’s biggest oil fields. Its Shiite majority has long ties to members of Saudi Arabia’s Shiite minority who happen to live in those oil fields. So the large demonstrations sweeping Bahrain are too close for comfort. A falling Saudi domino would resonate like a sonic boom.
A full-fledged oil shock is not necessarily destined to happen. But better keep on your seat belt, or maybe buy a gasoline station.