Will Oil Prices Derail The Economy?

Oil prices are on the march higher again today. Brent is trading above $115 a barrel. While WTI is now above $100. Federal Reserve Chairman Ben Bernanke does not believe the recent rise in oil prices will cause the U.S. recovery to buckle and fold. While the rise in prices has contributed to the rise in gasoline and food, Bernanke believes the commodity price woes are likely to be contained. Nevertheless, I reckon that the Fed Chairman is worried despite these sanguine public pronouncements.

Jeremy Leggett, founder and chairman of Solarcentury & UK Industry Taskforce on Peak Oil and Energy Security, said to CNBC that he is worried. He says "it’s very difficult to get to the truth. It’s a risk calculation in the face of significant uncertainty." No one knows how much supply is available at prevailing prices in the market. I would add that no one can say how high prices would have to rise to ensure sufficient oil supply to meet increasing demand.

Leggett is a proponent of alternative energy and believes that cheap oil is hard to come by. He suggests that a mix of fossil fuel and alternative energy sources will be a hedge against inflation. The first CNBC video is below, discussing peak oil, alternative energy, and European energy security.

These are interesting longer term ideas. But in the short-term, it’s all about the Saudis. In the second video below, William de Vijlder, CIO, BNP Paribas Investment Partners tells CNBC Europe that “we are getting closer to the tipping point where we move from an environment where we can digest an oil price increase and we have some visibility on how far it could go in terms of geopolitical developments”. Either the Saudis can meaningfully increase supply or we are going to have a serious spike and crash when demand is destroyed by the high prices.