BOSTON (TheStreet) -- Those hoping for a painless resolution to Middle East unrest may be disappointed, according to Barclays (BCS), which expects an "extended period of turbulence." This scenario, long considered a risk to the recovery, is upon us, threatening to curb consumer spending via exorbitant gas prices. Barclays, noting rising demand, is fearful. Morgan Stanley (MS - Get Report) and Goldman Sachs (GS - Get Report) are more optimistic.

According to Barclays, Chevron ( CVX), Husky Energy ( HSE), Imperial Oil ( IMO), Murphy Oil ( MUR) and Petroleo Brasileiro ( PBR) have no exposure to the so-called MENA, or Middle East and North Africa, region. Also, Imperial Oil ( IMO) has production that is entirely sourced from OECD, or Organization for Economic Cooperation and Development, countries, so it appears safe.

Marathon Oil ( MRO) has the greatest exposure to West Texas intermediate, with an estimated 75 cents of incremental earnings per share for every $10 rise in the commodity. (Barclays believes the spread between West Texas and Brent crude is "too wide" and ultimately "will correct itself.") The firm with the greatest MENA exposure is Exxon ( XOM), with 19% of 2009 production coming from that region.

West Texas intermediate crude has risen past $105 a barrel, dragging down the S&P 500. A fragile economic recovery is threatened by too-high energy prices. Atlanta Federal Reserve President Dennis Lockhart remarked to Bloomberg that research indicates a "high correlation" between oil-price shocks and recessions. This risk comes at a time of accelerating global demand and narrow spare capacity, currently, at less than 5%.

Furthermore, U.S. oil inventories are on the decline, presenting another price catalyst. Barclays cites Nigeria, Iraq, Iran and Bahrain as the next dominos in the geopolitical-risk chain, calling 2011 "the year of living dangerously." Yet the shock may not be a phenomenon limited to this year. Brent crude implied volatility has risen from 24% to 42% in just two weeks.

Barclays says the swings, as much as $10 intraday, may be a "precursor of times to come" as spare capacity and supply slack tighten. Oil demand growth in OECD countries has risen, year-over-year, for 10 consecutive months. And emerging market nations, most recently India, have surprised to the upside in their consumption needs. U.S. oil demand is up 633,000 barrels per day, on a year-over-year basis, according to Barclays. Chinese import data reflects a 750,000 barrel per day. Barclays believes that "the global economic crisis has merely postponed, but not canceled, an oil crunch that would otherwise have started biting some two years ago." Oil touched an all-time high of $147 during July of 2008.

The gridlock and supply loss in the Middle East may have a longer-term negative effect on oil prices: Social unrest, if not dealt with soon, may defer foreign investment in the region from exploration companies and further restrict supply in the long run and exacerbate volatility in the short run. Oil production in select countries, such as Oman, which has suffered technical problems, including a high decline rate, has expanded in recent years due to foreign investment. If international companies exit from oil-producing countries with specific technical problems, requiring foreign expertise, it "may be extremely damaging in the longer term."

Another country presenting significant risk is Iraq, due to waning U.S. influence there and embedded optimism for production as high as 10 million barrels per day when the country recovers and its economy matures. Barclays warns that public protests and damage to the Iraq energy infrastructure would force the bank to revise downward its current projection for 3.5 million barrels of production a day by 2014.

Barclays warns that geopolitical risks abound and other global banks have also adopted a more cautious view on growth. Citigroup ( C - Get Report), forecasting Brent at $105 in 2011 and $100 in 2012, expects a "fear premium" in the market with further upside risk and forays to $120, assuming output disruption is maintained through the second quarter. Risks include what Citigroup calls "low risk/high impact" countries such as Kuwait, which appears stable, but is a "heavyweight OPEC producer" that is integral to the global supply chain. "Days of rage", or anti-government protests, are being planned over the next few days. Presenting concentrated risk, Saudi Arabia represents 68% of OPEC's spare capacity, according to Citigroup, so ongoing stability in that country is of importance to near-term prices. Saudi Arabia claims 12 1/2 million barrels a day of potential capacity, which Citigroup doubts. Saudi Arabia's production peaked at 9.5 million a day during the 2008 crisis.

Citigroup is maintaining its U.S. GDP forecast at 3.5%, noting that "severe economic weakness associated with oil price increases have been associated with falling production, not merely higher quantities demanded (and higher prices)." Thus, it's premature to expect significant declines in growth resulting from oil, as the rise still represents a pricing of risk. Citigroup notes that there is risk to its U.S. growth forecast, but not "an outright threat to expansion."

Morgan Stanley calls the oil shock "a mild challenge to the expansion" as monetary policy is likely to remain accommodative, even as non-core inflation rises. Core inflation should remain below 2%, providing justification for easy monetary policy at the Fed. Federal fiscal austerity, another threat to Morgan Stanley's 4% 2011 growth estimate, isn't expected.

Goldman Sachs, going even further, expects the U.S. equity market to outperform, despite the oil risk. It notes that "during the six oil price shocks since 1970: (1) the S&P 500 rose during half of the episodes; (2) energy uniformly outperformed consumer discretionary; (3) supply-driven shocks favored defensive sectors; (4) demand shocks benefited cyclical sectors; and (5) P/E multiples contracted."

Goldman expects the S&P 500 to rise 14% to 1,500 within the next 12 months, forecasting $96 a share of earnings in 2011 and $106 in 2012. Currently, the large-cap benchmark sells for a forward earnings multiple of less than 14, a historical discount.

Goldman says it is "among a minority of market participants who espouse this view" of a solid outlook for U.S. stocks as clients remain concerned that oil is "a tipping point for stocks." They aren't considering recent economic performance, which reflects an accelerating recovery. Current oil prices are consistent with Goldman's S&P earnings forecast, but any further rise in West Texas oil "poses a downside risk" to equities.

Goldman says investors expecting short-term high crude should sell consumer-discretionary stocks and buy energy shares, a combination that "profited in all six cases" and "with an average price return of 46%." Other historically profitable trades amid oil price shocks include shorting the 10-year Treasury and purchasing gold. As concerns currently pertain to supply, previous supply-shock winners, aside from energy and materials, were health care, telecom services and utilities, along with a strengthening U.S. dollar.

In demand-driven price shocks, cyclical sectors, including financials, technology and industrials, outperformed along with materials and energy stocks as the U.S. dollar weakened. Sustained high oil prices would lead to falling stocks, Goldman says.

If oil hits $130 and stays at that level, longer-term, Goldman would expect a modest drag on S&P earnings, but pronounced multiple contraction to less than 12 times forward estimates. That means that such a rise could precipitate a 15% decline in the S&P 500 to 1,110. But, that scenario requires a "drawn-out supply disruption", which Goldman's forecasters don't predict.

Bank of America ( BAC - Get Report) Merrill Lynch is reiterating its bullish stance on energy services and deepwater-drilling stocks, specifically, Cameron ( CAM), Dril-Quip ( DRQ), Ensco ( ESV) and Noble ( NE), to its institutional clients.

-- Written by Jake Lynch in Boston.


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