Oil has cracked $100 (U.S.) a barrel for the first time since the global economic implosion in 2008, sparking new fear that the crucial commodity will undercut the recovery around the world.
Oil - which has shot higher because of the uprising in Libya - threatens several important and fragile corners of the economy. Airlines are bracing for higher costs and worry that people will fly less, or not at all. As the price of gasoline rockets higher, it brings trouble to auto makers just as they regain their balance after multibillion-dollar bailouts.
As vulnerable sectors are buffeted, the shock ripples through the rest of the economy: transportation industries from trucks to trains try to pass costs on to shippers, who then try to load the extra weight on consumers' final bills.
"It's a new and unwelcome risk," said economist Douglas Porter of BMO Nesbitt Burns.
"Oil has a long and storied history of causing serious problems for the global economy, and the United States economy in particular. But it's not the short-lived spikes - it's the sustained periods of major increases."
While Libya is a relatively small oil producer - it pumps only about two-thirds of Canada's output - traders are concerned about other oil-rich countries descending into chaos and taps going dry. On Wednesday, the Libyan leader was preparing to make a final stand with his last remaining supporters as cities and towns around the capital were falling to opposition protesters and foreign countries scrambled to evacuate thousands of citizens.
On Thursday, Brent crude jumped as much as $8.54 a barrel to a peak of $119.79. Brent has risen around 15 per cent in four days. U.S. oil was trading as high as $100.78 at 7 a.m. ET.
The darkest forecasts are starting to factor in the ongoing civil unrest. An analyst at the brokerage Nomura on Wednesday said oil could leap past $200 a barrel if oil production in Libya and neighbouring Algeria was completely halted. The figure is far beyond oil's peak near $150 in 2008. That price strained some sectors of the global economy, which compounded the subsequent financial crisis when bad housing loans nearly destroyed U.S. banks. All together, it led to recession.
A long period of high oil prices would sink the world's economies and plunge the fragile global economy back into recession, said Nobuo Tanaka, chief of the International Energy Agency, a policy adviser to Western countries.
"If $100 continues through 2011 - we call it the oil burden - this will create the same level of crisis as in 2008," Mr. Tanaka told Reuters in an interview.
The potential economic damage was clearly visible in the stock markets on Wednesday. Share prices plunged 7 per cent for United Continental airlines in the United States, and Air Canada stock fell 4 per cent. General Motors was down 3 per cent, and auto parts makers also lost ground.
In Canada, the average price of gasoline has climbed to $1.15 (Canadian) a litre, 10 per cent higher than a year ago, according to statistics compiled by Kent Marketing. The current price is also higher than at the same point in 2008, the year gasoline reached a record $1.40 a litre in the middle of July, peak driving season.
Beyond oil, food prices have also soared. The cost of staples such as wheat and corn is dangerously high, the World Bank said this week, particularly for poor countries. Economists in general are warning of a "twin commodity shock" that would force people in rich and poor countries to pay more for fuel and food and slash the kind of discretionary spending that has bolstered the economic recovery.
A Reuters tally suggested about 400,000 barrels of oil in Libya - a quarter of the country's production - have been cut off. Saudi Arabia, the world's No. 2 oil producer behind Russia, has tried to calm consumers, insisting it has enough oil in reserve to replace any lost production. Saudi Arabia produces about 8.3 million barrels a day now, with spare capacity of about four million barrels.
While battles rage in Libya, and countries on the Saudi border such as Bahrain and Yemen face their own upheavals, experts don't see the democracy movement spreading to Saudi Arabia. The country's King Abdullah, who returned home this week after an absence for medical treatment, is well liked. Bolstered by a massive oil fortune, on Wednesday the king announced $35-billion of new benefits for Saudis, from funding for home loans to cash for services such as education and money to hike state workers' pay.
Dissent remains modest. A recent open letter to the King signed by intellectuals called for some reforms.
Meanwhile, Oil Minister Ali al-Naimi insisted on Tuesday that Saudi Arabia can deliver oil if necessary: "We have done this so many times, responding to emerging crises on the side of supply. We have enough credence to tell you that we will meet any shortage."
Analyst Martin King of FirstEnergy Capital in Calgary didn't doubt the Saudis' ability to produce additional oil, but noted the quality was a question. Libyan oil is easy to refine into gasoline. Extra Saudi oil would likely be lower quality.
Oil traders were not reassured by Saudi Arabia's effort to talk down the market. The benchmark contract for West Texas Intermediate oil touched $100 (U.S.) a barrel early Wednesday afternoon, the first three-digit trade since September, 2008, the month the U.S. financial system nearly collapsed.
Oil finished the trading session at $98.10, up 3 per cent. Other futures contracts - from May through the end of the year - all bashed though $100 and closed above that mark, suggesting traders believe prices could stay high rather than quickly fall away.
However, veteran oil markets analyst Michael Lynch noted that, while the political uprising in Egypt catapulted prices higher, they quickly fell back. Because Libya is a notable oil producer, he doesn't expect prices to roll back as fast, but he doesn't believe they can stay at levels that would cause significant economic damage.
"It's not so much the barrels but the fear; traders are worried things will get worse," said Mr. Lynch, president of Strategic Energy and Economic Research Inc. of Cambridge, Mass. "It's highly likely that once things settle down, there'll be a huge give-back in prices."
With a report from Greg Keenan and a file from Reuters