A conflict in the Middle East that closed the Strait of Hormuz would precipitate a U.S. recession.

• With luck, the U.S. will not see gasoline prices top $4 per gallon this year.
• Rising oil prices will not hinder economic growth in 2012 as much as they did in 2011.
• A conflict in the Middle East that closed the Strait of Hormuz would precipitate a U.S. recession.

Much as they did a year ago, energy prices have emerged as key risks to the U.S. recovery. Concern about oil price shocks is well-grounded; 10 of the last 11 recessions have been preceded by such shocks. Brent crude oil futures have risen nearly 17% since the start of this year to $125 per barrel, pushed up by improved expectations for global oil demand, a cold winter in Europe and northern Asia, U.S. dollar depreciation, production disruptions, and rising geopolitical tensions.
We believe oil prices have essentially peaked, however. Assuming they remain around current levels, average U.S. prices for regular unleaded gasoline should stay below the psychologically sensitive threshold of $4 per gallon. It would take an unanticipated shock to keep pump prices above that level for more than a short time.

Moody's Analytics