$100 Oil May Mean Recession as U.S. Economy Hits `Danger Zone'

Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.

``We are in a danger zone,'' says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. ``It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.''

Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected U.S. growth to slow to less than 2 percent in the fourth quarter -- half the third quarter's pace. Andrew Cates, an economist at UBS AG in London, said his models suggest a 45 percent chance of a U.S. recession next year, up from 33 percent last month, as oil prices prove a ``growing concern.''

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade. The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 percent from 2.5 percent, partly because of costlier crude. The economy grew 2.8 percent last year.

Energy Efficiency

The world economy may still dodge recession as emerging markets continue to expand. A report last week by Deutsche Bank AG said gains in energy efficiency mean the effect of more expensive oil will ``remain muted.''

Even so, gloom is spreading at a speed that suggests ``we're walking a really fine line,'' says John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``Even a month ago, you probably wouldn't have thought we'd be seeing a sustained credit problem and oil holding up above $85 a barrel.''

Crude oil traded at a record $98.62 last week on the New York Mercantile Exchange and ended the week at $96.32, bringing its increase this year to 58 percent. Prices adjusted for inflation exceed the previous record, set in 1981 when Iran cut exports.

The dilemma for central banks is how to balance oil's drag on their economies against the risk of higher inflation. Fed Chairman Ben S. Bernanke told Congress Nov. 8 that oil prices threaten both ``renewed upward pressure'' on inflation and ``further restraint on growth.''
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