Here I provide some more background on the relation between oil price increases and economic recessions.He references papers. Go read the blog entry to access these.
When I first began working on my Ph.D. dissertation in 1980, I was intrigued by the fact that the oil embargo of 1973-74 and the collapse in Iranian oil production after the revolution in 1978 were both followed by global recessions. But when I called attention to the fact there had been a sharp increase in the price of oil prior to 6 of the 7 postwar U.S. recessions up to that point, the general response was one of skepticism.
By the time I was presenting evidence of this relation at various seminars in 1981-82, the Iran-Iraq War had produced yet another shock to world oil markets and the NBER declared that the U.S. experienced a new recession immediately on the heels of the previous downturn, meaning that the evidence had now become that 7 out of 8 recessions had followed oil price increases. That research was subsequently published in the Journal of Political Economy in 1983 and the Energy Journal in 1985. My ideas about how this relationship might be explained by disruptive changes in the composition of spending appeared in the Journal of Political Economy in 1988.
We received some more evidence on this relationship when Saddam Hussein invaded Kuwait in August 1990, causing oil prices once again to double and coinciding with the 9th postwar recession. The price of oil also shot up before the 2001 recession. Add in the conjunction of the oil shock of 2007-08 with our current economic pickle, and my count is now up to 10 out of 11.
For the record, my position has never been that oil prices were the sole cause of all of these recessions. But the evidence persuaded me that oil must have been a contributing factor in at least some postwar recessions.
Tuesday, April 28, 2009
Oil Price & Recessions
Here is an interesting blog entry by James D. Hamilton in his Econobrowser website. It makes sense to me that if you jack up the cost an essential resource, you tend to push an economy into recession:
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It has been my theory for some time that gas prices have been one more major affect on the recession and part of that theory is how I feel when I see the prices going up. The other indicator to me was the extra expense that people who use diesel, in their business, were going through on a daily basis. I found it hard to believe that they could absorb a $3.- $4. per gallon increase. Some were able to pass the cost on to customers, but that just increases the cost of everything for everyone. Looking back, it is ludicrous to believe that fuel cost increases had a minor affect on the economy as many tried to make us believe.
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