Oil prices surging to $200 a barrel could send the economy into recession: Goldman Sachs

Should oil prices explode to $200 a barrel as some experts have warned, Goldman Sachs thinks the U.S. economy would probably enter a recession (or already be in one).

“We estimate that it would take a sustained oil price increase to $200 per barrel to produce an income shock similar in magnitude to those that precipitated the 1974 and 1979 recessions — and this would significantly increase the 2022 recession odds,” Goldman Sachs chief economist Jan Hatzius said in a new note on Thursday.

Oil prices have come off their highs of around $140 a barrel seen at the start of the Russia-Ukraine war, but remain uncomfortably high. Brent crude oil hovered at $122 a barrel Thursday amid concerns on a new spate of sanctions on Russia by the West.

Prices for Brent crude oil have more than doubled compared to this time last year.

“It is not unfathomable for prices to rocket to $200 a barrel by summer, spur a recession and end the year closer to $50 a barrel ($200 call options have been bid). To be clear, this is not our base case, but such a scenario does not sound implausible today,” said RBC Capital Markets analyst Michael Tran on Yahoo Finance Live.

Meanwhile, the national average price for gasoline is up 71.5 cents from a month ago and $1.37 per gallon higher than a year ago, according to GasBuddy. In turn, that has sent consumer confidence plunging and concerns sweeping Wall Street of a consumer spending pullback (which could lead the economy into a recession).

While Hatzius is worried about a recession, he isn’t yet ready to predict one for this year despite elevated energy and food costs. Hatzius is modeling for 1.9% GDP growth in 2022.

“The commodity shocks in the early stages of the 1974, 1980, 1990, and 2008 recessions fully offset the year-on-year trend in real incomes — implying no scope to increase real consumption without drawing down savings. This is not the case in 2022 thanks to strong payroll and wage growth, nor was it the case during the commodity upswings and continued expansions of 1999, 2005, and 2010. Additionally, the $2 trillion-plus of excess savings accumulated during the pandemic and the record-high household wealth-to-income ratio represent additional buffers for consumer spending growth this year,” explains Hatzius.

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Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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