It’s the Oil, Stupid
I am no economist, but bear with me while I try to explain why I think we are in for a very long and difficult economic period. My thesis for The Long Recession goes something like this: Historically, when oil prices rose quickly and remained high the economy struggled. High oil prices lead to recessions and depressions, because they suck so much money out of the economy. A person whose energy bills go up by $100 or $200 per month has that much less to spend on other things. It is essentially like a tax applied to everyone that uses energy — with a large chunk of the money exiting the U.S. and contributing to our trade deficit.
Historically after a period of high oil prices, people start to modify behaviors, and at the same time producers rush in to take advantage of higher prices. This generally leads to a decline in oil prices and the economy recovers. But I believe this time is different. And if not this cycle, very soon. Because while we are already seeing consumers modify behaviors (U.S. oil demand is creeping back up, but still below the levels of 2 years ago), we aren’t seeing a lot of new oil coming online “to the rescue.” The reason for that is that there just isn’t a lot of new oil to be produced; i.e., the Peak Oil factor. So despite the fact that prices did crash following fast the run-up in 2008, prices quickly recovered back into recession-inducing territory.
That leads me again and again to the question: How do you recover from a recession when oil prices are high and show no sign of abating? We could recover from recession if demand drops a bit more and takes oil prices down. But, what happens when we start to come out of the recession? We use more oil, and if there are supply constraints this will send prices right back into recession country.
Today comes more bad economic news, and like much of the bad economic news makes zero mention of the role of high oil prices:
Second-quarter economic growth was revised to an anemic 1.6%, a decline that was slightly less than many economists had predicted. But the report was a sobering cap to a week of bad economic news that has raised fears the nation could plunge into another recession. Bernanke says the Fed is ready to step in to provide additional stimulus.
What I continue to forecast is a very difficult economic period in which we start to power down or continue to suffer the economic consequences. I don’t believe future economic cycles are going to look like those of the past 100 years because of oil supply constraints. I believe we are looking at an extended period of (at best) no-growth or very little growth. At some point, there are alternatives that will begin to fill a respectable gap, but I think that oil price point is back up over $100/bbl.
No doubt the housing crises was a major contributor to our current economic predicament, but even if we miraculously recover from that the oil price risk still hangs repressively over us. So while I appreciate that It’s the economy, stupid and the economic indicators get all the news, I believe the reason we are in for prolonged economic bad news is “It’s the oil, stupid.”