Blame it on the Oil

I love it when new research confirms that my deeply-held beliefs (or mere suspicions) are correct. The article I want to share with you today is an instance of just that. And I'm trying to behave myself and not type those 5 little words which comprise the title of Rush Limbaugh's second book.

I have been saying for some time that I believe that the high oil prices that reigned in the domestic markets (and newscasts) for the better part of 2008 were biggest cause of the economic downturn that reached "crisis proportions" by October. Economist James Hamilton agrees, in a reprise of a paper in which he detailed his study of several economic models that demonstrate the effect the oil price spike had on our Gross Domestic Product (GDP).  One sentence in his article stands out to me as quite striking:

"Although the approaches are quite different, they all support a common conclusion: had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the U.S. economy would not have been in a recession over the period 2007:Q4 through 2008:Q3."

Did you catch that?  Our banking system wasn't fundamentally flawed.  Our housing market wasn't in need of porkulus.  Had the oil prices not shot through the roof, we would not have been in a recession for most of 2008.  In fact, the role of home prices in bringing about our economic malaise is less significant than many of us thought, in that

"housing had already been subtracting 0.94% from the average annual GDP growth rate over 2006:Q4-2007:Q3, when the economy did not appear to be in a recession. And housing subtracted only 0.89% over 2007:Q4-2008:Q3, when we now say that the economy was in recession."

Hamilton also notes very plainly that "the biggest drops in GDP come significantly after the oil price shock itself."  While the jobs lost by our economy were real, they were a result of families having to spend more of their once-discretionary income on gas.  That deprived some sectors of the economy of income (and hence jobs).

The paper rightly concludes:

"The evidence to me is persuasive that, had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession."

The reasons for the high oil prices are probably numerous, and I don't want to debate them (now).  I will merely state, with this article presented as evidence, that oil is the lifeblood of this economy.  If we want a stable and growing economy, our supply of oil (until we no longer need it) must be kept stable (preferrably expanded).  We need a meaningful energy policy that includes both increasing our supplies of oil for the near future, and developing alternate energy sources for the more distant future.  To ignore our present need for oil in the name of finding other energy sources is just plain dumb.  And I wonder which one our current administration will likely ignore?  Perhaps this statement, made by Obama on the campaign trail, may answer the question:

"I think that I would have preferred a gradual adjustment [in gas prices]. The fact that this is such a shock to American pocketbooks is not a good thing."