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What’s next

So let’s predict again:

The global economy would collapse if oil hit $200 a barrel, said the top energy analyst at Germany’s largest bank. “Two-hundred dollar oil would break the back of the global economy,” Deutsche Bank AG’s Chief Energy Economist Adam Sieminski said in an interview today in Tokyo. “Next step after $200 would be global recession and bad news for everybody.”

Krugman estimates a 17% contraction at current price levels:

Many people have noticed that higher fuel prices are putting the brakes on globalization: if it costs more to ship stuff, there will be less shipping.

How big is this effect? We know that the volume of trade between any two countries falls a lot with distance; this indicates that trade is quite sensitive to transport costs. This study gives a number:

[D]oubling transport costs from their median value … reduces trade volumes by 45%. Moving from the median value of transport costs to the 75th percentile … cuts trade volumes by two-thirds.

Now, the fuel price increase doesn’t have that large an effect — at least not yet. But a very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17 percent contraction in trade if oil prices stay at current levels for a long time.

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