POINT OF VIEW

Will the Rising Price of Oil

Lead to a Double-Dip Recession in 2011?

 

 

When the economy tanked in 2007 – 2008, everyone placed the blame for the crisis on subprime mortgages and the housing bubble, inflation in financial assets in general and the overextension of consumer debt.  But, while those economic factors certainly were tinder for the fire, some of us have argued that a run up in oil prices was the spark that set off the blaze.   By forcing people to choose between spending money on gasoline, on mortgage payments, or on everyday purchasers for consumer goods, the enormous, sudden spike in the cost of energy in 2007 is what drove us over the brink.  For an excellent analysis of this impact, see the Brookings paper “Causes and Consequences of the Oil Shock of 2007-2008” by James Hamilton (www.brookings.edu/economics/bpea/bpea.aspx).  It should be noted that in a previous study (http://dss.ucsd.edu/~jhamilto/oil_history.pdf) Hamilton pointed out that 10 of the 11 U.S. Recessions since WWII have been preceded by an increase in oil prices.

 

Now that the economy is threatened once again, and consumer retail purchases have dropped for the first time in nearly a year people once again doubtlessly will argue about what it was that caused the drop.  If this decline continues, people will look back to this period and ask “What was the cause of the decline of 2011?”

 

Certainly one cause of that most recent decline may be reduced manufacturing output and another may be lower stock market prices – both of which, in turn, may be a result of the fear of a possible default in Greece, diminished Japanese output after its tsunami, and China’s slowing growth rate.  And any such manufacturing decrease and stock market decline have, in turn led to fewer jobs, lower incomes and diminished consumer confidence.   We leave it to economists like Professor Hamilton to quantify the impact and determine whether those factors have been greater or less than energy prices in causing the most recent economic decline.  But whatever their relative effect, it is undeniable that rising oil prices have once again made it impossible for consumers to spend on other goods and services, and are a significant factor behind the decline.  In fact according to Hamilton’s most recent analysis, the increase in energy costs has reduced GDP growth by about 1% http://www.econbrowser.com/archives/2011/05/will_high_oil_p.html).

 

Of course one cannot fairly blame President Obama or Congress for the tsunami in Japan or for economic conditions in Greece and China.  But one can place the blame squarely on their shoulders for a failed U.S. energy policy that has done next to nothing to reduce our dependence on foreign oil and insulate us from the repetition of the oil shocks we suffer time and again.

 

One of the reasons for that failure is a tendency in Washington to confuse and conflate the contentious issue of Global Warming/Climate Change with the very separate and far-easier to address issue of dependence on imported oil. Energy Independence does not require controversial solutions like carbon taxes or cap and trade.   And, while there may not be a quick fix for Global Warming, there is a quick fix to painlessly reduce foreign oil consumption by nearly 25% in less than a decade, without harming the economy and while improving environmental conditions.  It’s called the Open Fuel Standard (see www.ea-21.org/details.html for a comprehensive discussion of the strategy for reducing our dependence on foreign oil).

 

So, when future historians ask what caused the economic decline of 2011, the answer will be clear:  the failure of Washington leadership to rein in energy prices and offer Americans an alternative to oil, when those in Washington had every opportunity to do so.