Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis, the risk of a worse-than-expected slowdown in China, and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.
The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the United States are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.
The reason is fear. Not only are oil supplies plentiful, but demand in the United States and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the U.S. and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.”