Oil prices and the business cycle

Poorly regulated real-estate lending wasn’t the only cause of the economic meltdown now gripping the industrial economies. Oil addiction also contributed.

The extraordinary rise in oil prices since 2003 has sucked hundreds of billions of dollars out of the US economy (and the Cascadian economy). High oil prices have been a contributing cause of most recessions: Since 1948, “all large oil price increases but two have been followed by recessions,” as Andrew Hoerner and Nia Robinson of Redefining Progress (RP) write (pdf). “Four of the five recessions since 1970 . . . were preceded by big jumps in oil prices.” The figure above, from the Reserve Bank of St. Louis (hat tip to RP), illustrates the point. Shaded gray bars show the recessions officially declared by the National Bureau of Economic Research. The black and blue lines show the price of oil in inflation-adjusted “real” terms and in unadjusted “nominal” terms.

What’s more, the oil price surges of the recent past helped to trigger the wave of defaults and foreclosures that revealed the overextension of US mortgage lending. High energy prices have severely strained family budgets—especially low- and moderate-income family budgets. Some of those families couldn’t afford to keep paying their mortgages and also buy gasoline.

In short, if we weren’t so addicted to oil, we would not be so vulnerable to price shocks. This fact underlines the importance of seizing the opportunity of the financial meltdown and its resulting economic downturn to break the addiction.