“Four of the last five global recessions were caused by huge spikes in oil prices. And the world economy is coming off the mother of all spikes.”
— Jeff Rubin, chief economist for the CIBC
Back in October, Jeff Rubin looked at the housing meltdown and found that it didn’t fully explain the global recession that was then forming.
In fact, a much better explanation came from the run up in global oil prices. From 2002 to last summer’s spike of $147 a barrel, the cost of oil had gone up 500 per cent.
This dwarfs any of the previous oil shocks.
The formation of OPEC in the ’70s caused oil prices to roughly double. That, in turn, caused the recession of 1974.
A few years later, the Iranian revolution caused another doubling of oil prices. This led to the recession of the early ’80s.
Likewise, the first Iraq war caused the recession of the early ’90s. But none of these events was associated with a quintupling of oil prices, like we saw in the last few years.
Rubin also looked at how the European and Japanese economies responded to the recent run-up in prices.
Their economies were much less prepared to deal with high oil prices, since they produce very little of their own oil. The U.S., on the other hand, produces 5 million barrels of oil daily, so it is somewhat more shielded from price shocks.
This meant the European and Japanese economies would suffer from $100 barrels of oil well before the U.S. would. And indeed, by the second and thirds quarters of 2008, most of those economies had spiraled down into a recession (and Japan has now even sunk into a technical depression).
The U.S., however, didn’t go into a technical recession until the fourth quarter of 2008.
The notion that housing foreclosures in places like Cleveland and Detroit are the main cause of the global recession is a stretch. If anything, it was the failure of companies like GM to acknowledge a finite supply of fossil fuels that crushed the economy in Detroit.
The Hummer is now a fitting monument to myopia.
The other boogie man that people use to persuade themselves the world isn’t running out of cheap oil is speculation by oil traders in pin-striped suits. They want to blame Wall Street for running up the price of oil to $147.
Although speculation on oil futures did exacerbate short-term prices, this was mainly just the tip of the iceberg.
People tend to forget that speculators also sell oil futures. After all, the last thing a trader wants is a line of tanker trucks showing up at their front door wanting to dump off several million gallons of sticky black goo. They just want to make some money in the short term.
As the International Energy Agency noted, “There is little evidence that large investment flows into the futures market are causing an imbalance between supply and demand, and are therefore contributing to high oil prices.”
Assigning blame to boogie men is comforting. Back in the Middle Ages, people had Grimm’s Fairy Tales and witches and trolls residing under bridges. Today they have the physical sciences, such as petroleum geology.
They also have the social sciences, such as economics, which, if reasonably distanced from ideology, can give people a good idea of what the world is up against.
The biggest problem right now is that people tend to pay more attention to reality TV and pro sports than they do to the type of world that their children will inherit.
When the next big oil shock rears its ugly head (and when $147 a barrel will seem like a bargain basement price), they may once again be looking for scapegoats.
Perhaps they should be listening to Pogo: “We have met the enemy and he is us.”
Evan Bedford is a local environmentalist. Direct comments, questions and suggestions to firstname.lastname@example.org.