According to Bank of America, the U.S. economy could suffer a major shock if oil prices trade above $100 a barrel for some time. Oil prices have soared since last weekend’s U.S. and Israeli attacks on Iran, with West Texas Intermediate futures posting their biggest weekly gain on record, soaring 35%. Benchmark U.S. crude oil closed at $90.90 per barrel on Friday. This is close to the level that BofA global economist Claudio Yrigoyen said would cause a “non-linear” effect on the economy. “If current conditions continue… concerns about (oil-induced) inflation will diminish,” Yrigoyen wrote to clients in a note on Friday. “However, an escalation in which oil prices sustainably exceed $100 would be more of a concern.” @CL.1 5D Mountain West Texas Intermediate Oil for the past 5 days. Yrigoyen said the economy is “more sensitive than usual to the market” as higher-income consumers are driving spending. This group is more likely to own stocks, and the recent rally in stock prices has helped boost confidence and encourage spending. Curb spending If the stock market continues to slump due to rising oil prices, higher-income consumers could cut back on spending, making the economic shock even worse, Yrigoyen said. The economist said low-income consumers would be hit even harder by rising gasoline prices. The average price of a gallon of gasoline nationwide rose by the most in three days since 2008, according to Bespoke Investment Group’s AAA data analysis. The average gallon of gasoline in the U.S. hit $3.25 on Thursday, 27 cents more than a week earlier, according to a U.S. travel group. When it comes to credit cards, car loans and other types of fixed payments, Yrigoyen said lower-income households are “already struggling, and further delinquency could increase if higher energy prices further erode their real spending power.” “In turn, if this limits their access to credit, it could have a lasting impact on their ability to spend.” Yrigoyen said more expensive energy could also cause a “bottleneck” in capital investment in artificial intelligence. Bank of America’s gross domestic product forecast includes tailwinds from AI-related investments, such as data center construction planned by the biggest technology companies, including Microsoft and Google parent Alphabet. But if any of these projects are delayed as a result of rising energy prices, it would be a headwind to growth this year, the economist said. Ultimately, Yrigoyen said, a sustained rise in oil prices above $100 per barrel would likely reduce GDP growth by more than 0.60 percentage points. He said a doubling of oil prices would likely lead to a recession.
