The Future of Oil: Four Scenarios

Standard and Poor's

The Gulf goes dry
In this scenario, Iran closes the Strait of Hormuz to oil tankers. Oil prices spike sharply. World oil supplies would be cut by about 20%. World strategic petroleum reserves are tapped extensively, but even so, oil prices rise to $250 per barrel. The world economy moves into recession, on the order of the 1980-1982 downturn. The U.S. is the hardest hit of the major economies, with real GDP dropping 5.2% below the baseline in late 2007, implying a major recession, and the unemployment rate reaching 7%. Consumer price inflation hits 10% next year as oil prices soar. The impact on Europe is smaller, but because the Continent started with weaker growth, the recession is just as big. Japan has a recession of similar size.

Both in terms of the price effect and the supply impact, the models are being pushed well outside their historical range, and the dislocations could be even more painful than this projection implies. This is by no means a worst-case scenario but closer to a best case given the closure of the Strait. We think (and certainly hope) this is an unlikely scenario.

	2004	2005	2006	2007	2008
Real GDP (% chg.)	4.5	3.5	2.7	(1.6)	4.0
Consumer spending (% chg.)	3.7	3.5	2.0	(2.5)	2.7
CPI (% chg.)	2.7	3.4	4.1	9.6	0.2
Core CPI (% chg.)	1.8	2.2	2.6	4.2	4.1
Oil price (WTI) ($/barrel)	41.0	56.6	91.7	238.2	106.9
Unemployment rate (%)	5.5	5.1	4.9	6.7	7.0
S&P 500 index	1133	1207	1218	793	965