"Will a Recession Hit If Oil Surpasses $100?" What to Watch Instead of Oil Prices [Weekend Money]

As international oil prices have surpassed the $100-per-barrel mark, concerns about an economic recession are emerging. However, some analysts argue that it is premature to discuss a recession based solely on real oil prices at this time.

Jin Young Choi, a researcher at Daishin Securities, stated in a report, “The International Energy Agency (IEA) has warned of demand destruction (onset of a recession) due to the recent surge in oil prices, leading to fears of an economic downturn. However, when considering the real oil price that reflects inflation, as well as trends in grain and fertilizer prices, the likelihood of an immediate recession remains low.”

According to the report, the recent escalation of supply chain disruptions in the Middle East, production setbacks at Russian oil facilities, and the year-end liquidity effect are all converging, raising the possibility that oil prices will hit an all-time high next year. There is also a growing upward pressure on the Producer Price Index (PPI) due to the sharp rise in refining margins (crack spread).

Choi expressed the view that a simple increase in oil prices does not directly trigger a recession. “If you look at real oil prices adjusted for inflation, the periods from 2005 to 2007 and 2009 to 2013 were higher than current levels, yet they did not immediately lead to a recession,” he explained. “This illustrates why the IEA’s claims, which primarily reflect the concerns of oil-consuming countries, should not be accepted uncritically.”

While it is clear that high energy prices can cause stagflation and eventually lead to a future recession, there are crucial factors involved in that process. The key is the rise in fertilizer and grain prices, which dominate food costs. Choi noted, “The prices of nitrogen fertilizers that depend on natural gas and coal have not yet entered a full-fledged upward cycle, so it is still too early to discuss a recession. The rise in energy prices eventually drives up fertilizer costs, increasing the burden on farmers and triggering agflation on a lagged basis. If you look at previous periods right before a recession, you will see that increases in fertilizer and grain prices always set the stage.”

Choi suggested the gold-to-copper ratio as a key indicator for predicting the timing of an economic slowdown, rather than oil prices. Gold, as a safe-haven asset and a representative hedge tool, tends to reflect changes in liquidity four to six months ahead of leading cyclical assets such as equities.

Choi said, “If you compare this leading gold-to-copper ratio with the Institute for Supply Management (ISM) manufacturing index, which tracks the current state of the economy, it is possible to estimate that the peak will be reached between July and September next year, followed by a slowdown. If global central banks further tighten their policy cycles, it will be possible to pinpoint the onset of a future recession more precisely. In that sense, it is premature to discuss a recession today based merely on the current jump in oil prices,” he added. “From a commodities perspective, this is a point in the cycle that calls for active sector rotation.”

This content was produced with the assistance of AI translation services.