If oil prices climbed to $100 per barrel, a number of sectors would take a financial hit, but it wouldn't lead to an economic recession, according to credit analysts at Standard & Poor's.

"Oil at $100 a barrel would damage consumer spending and slow the economy, but it wouldn't stop it," says S&P chief economist David Wyss.

He estimates that $100 oil could drop 1.5 percentage points off real U.S. GDP growth by year-end 2007, bringing growth down to around 1%. "The good news is that there wouldn't be a recession. The bad news is a big slowdown in growth."

John Thieroff, S&P energy analyst, says fear and speculative pressures have a hand in propping up current oil prices. In the event of $100 oil, the benefits would not be distributed equally and a run-up in prices would trigger an even greater wave of mergers and acquisitions, he says.

"Oil-weighted companies would benefit the most," Thieroff says. "We expect the disconnect between oil and gas prices is just through the near-term. The prices for both are being driven by different issues, but there's not much fuel-switching left to be done by industrial users."

Producers and service companies with oil-driven international operations would also benefit, Thieroff says.

As for M&A, the run-up in natural gas prices late last year and into 2006 confirmed that there is no shortage of companies willing to buy at or near the top of the cycle, especially if a strong futures market exists to guarantee favorable economics at high deal prices, Thieroff adds.

"There are two factors driving the oil and gas M&A boom: many companies are cash-rich and opportunity-poor, and the price of oil is determined on the commodities exchange at about $25 to $30 per barrel higher than the price implied in the equity valuations of producers. Higher oil prices would likely exacerbate these issues, especially if the forward curve offered several years of protection to those willing to take it."

Thieroff calls the disconnect between the price of oil on Nymex and in the securities market a "double-edged sword."

"While it may make corporate deals cheaper, it makes issuing nondiluted equity for a pricey acquisition a very difficult proposition. As a result, that funding for M&A has risen considerably and leveraged buyouts between large independent E&Ps are being taken seriously."

If consumers are forced to spend more for gasoline, oil or natural gas, retailers and restaurants that cater heavily to low-income customers could be in a bind.

"Any potential spike in oil costs to $100 per barrel will likely hit retailers such as fast food chains and discounters the hardest," says S&P credit analyst William Wetreich. "Large-ticket sales such as electronics, appliances and home furnishings may also feel more impact from a spike in gasoline prices."

The automotive industry is already feeling the squeeze of higher fuel costs. Consumers typically consider fuel costs when buying a car, and General Motors Corp. and Ford Motor Co. have seen sales of sport utility vehicles drop in the first half of the year, according to Robert Schulz, S&P automotive analyst.

"With all these negative events occurring without $100 oil, it seems clear that $100 oil would add a much sharper point, and perhaps a faster pace, to these challenges."

The airlines wouldn't fare any better. Credit analyst Philip Baggaley says most airlines are too financially weak to handle hedging fuel costs, and they're still struggling with the way fuel costs have climbed 140% since 2003.

"A fuel-price rise to $100-a-barrel oil would drive costs beyond what could be recovered in higher airfares," Baggaley says. "The airlines would be caught in a squeeze, with costs going up and passenger demand faltering in a slowing economy."

Thanks to its diversity and strong business models, the chemicals sector is reasonably well insulated against the effects of spiking oil prices, says credit analyst Kyle Loughlin. "The pressure of higher oil prices would be muted by the fact that the sector is in the high point of its cycle, which should last into 2007."

Though several factors could push oil prices higher, the analysts agree that one of the most immediate possibilities would be a supply interruption from a major producer, such as Iran.



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