Fear of $150 -a-barrel Oil Could Thwart US Recovery

Wednesday, 09 Nov 2011 01:36 PM

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With the stock market sliding on news of Italy’s financial troubles, the nation’s economy could be in for a second hit and analysts fear Iran’s nuclear ambitions could lead to a significant spike in worldwide oil prices.

The Dow Jones industrial average dropped over 200 points in early trading Wednesday as news of Italy’s troubles continued, raising fears that the country would join Greece, Ireland and Portugal as a nation in need of a bailout.

However, Italy’s debt of $2.6 trillion is much larger than the other European countries that have needed bailouts and there are doubts whether other European nations could help. The crisis has led to Italian Prime Minister Silvio Berlusconi pledging to resign.

“Evidently the markets don’t believe that Italy has the will to carry out the reforms that Europe asks of us,” Berlusconi said in an interview with Sky TV. “We have to show the markets that we are serious ... for the good of the country.”

Complicating matters are fears over Iran’s nuclear plans. According to the International Atomic Energy Agency, the world’s fourth largest oil exporter continues to work on developing a nuclear weapons and its research has now included the testing of components. The situation could lead to sanctions or even a military attack.

Morgan Stanley analysts, according to Bloomberg, are predicting “significantly higher” oil prices should supplies be disrupted, which will translate to higher prices at the pump. Iran produces about 5 percent of the world’s oil, pumping out some 3.6 million barrels a day.

"Disruptions to Iranian supply would drive oil prices significantly higher," the financial services firm said in a report.

Oil prices have hovered around $100 a barrel this year but there are predictions it could surge to $150 a barrel in the near term.

“Short-term pressures on oil markets may be eased by slower economic growth and by the expected return of Libyan oil to the market, but trends on both the oil demand and supply sides maintain pressure on prices,” the International Energy Agency said in its annual World Energy Outlook.

However, the IAE added in its report that if, between 2011 and 2015, investment in the Middle East and North Africa “region runs one-third lower than the $100 billion per year required … consumers could face a substantial near-term rise in the oil price to $150/barrel.”

According to reports, IEA economist Fatih Birol said high oil prices threaten economic growth worldwide.

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