NABE Panel: $100 per Barrel Oil Would Cause Recession

“NABE members believe that oil prices above $100 per barrel would probably cause a recession but don’t believe they will go that high,” says Stuart Hoffman, NABE President and Chief Economist, PNC Financial Services Group. “They see little prospect of significant substitution of other technologies for oil in the next decade.”

The NABE Economic Policy Survey presents the consensus of a panel of 195 members of the National Association for Business Economics. Conducted semiannually, this survey was taken August 1 – August 15, 2006. May be reprinted in whole or in part with credit given to NABE. This is one of three surveys conducted by NABE. The other two are the NABE Outlook and the NABE Industry Survey. David Wyss of Standard & Poor’s, Kathleen Camilli of Camilli Economics, and Catherine L. Mann of the Institute for International Economics, conducted the analysis for this report.

Survey Highlights

Terrorism continues to be the biggest short-term problem facing the U.S. economy, according to 34% of respondents, up from 26% in March. Energy was the biggest fear of 29% of respondents, up from 23%. Worries about inflation moved into third place, ahead of the trade deficit.

In the longer run, the federal deficit and an inadequate educational system are the primary problems, each chosen by over one-fifth of respondents. The largest strength continues to be the flexibility of the economy, with technology close behind.

Monetary policy is about right. Although 71% of respondents said current monetary policy is about right, the panel split on where it should go, with 29% wanting further rate hikes, 17% wanting cuts, and 53% preferring to leave rates at their current level. Only 57% of respondents expect the Fed to tighten, down from 89% six months ago. Most (53%) of respondents feel that press reports of poor communication by the Fed are overplayed, and that communication is no worse than usual.

Fiscal policy is too loose, according to 68% of respondents. Although 75% thought budget deficits should be cut, only 17% thought deficits would actually drop, while 35% expect deficits to increase. How to reduce the deficit was less clear; the panelists voted that extending the tax cuts was their first fiscal priority, while raising taxes or allowing the cuts to expire ranked second, showing a sharp division of opinion.

Most economists believe that the Middle East violence will not result in major disruptions to oil supplies. Only 35% thought that war would expand. The median estimate of next summer’s oil price was $75 per barrel, about the level that it was when the survey was taken. About 25% expect prices to drop by at least $10 per barrel, and a similar percentage expect a $10 per barrel or more increase. On average, the panelists thought that oil would have to reach $100 per barrel to cause recession.

How to reduce oil dependence was less unclear. Only 38% of respondents thought that any combination of policies could allow the U.S. to eliminate reliance on non-North-American oil. On a scale of 1 to 5 (1 most promising), ethanol and biodiesel were seen as the most promising at 2.3, followed closely by nuclear (2.4). Hydrogen was seen as least likely to succeed (5.3). Nearly half (48%) of respondents think the world has sufficient oil, but that we should reduce dependence on the Middle East.

Health care costs are not likely to be controlled, according to 53% of respondents, but more costs will be pushed onto patients. The new Medicare Part D drug benefit, which has added to costs, should be controlled by allowing more bargaining with the drug companies, but only 12% thought it should be repealed, although a further 16% recommended it be restricted to only indigent patients.