6 Of The Last 8 U.S. Recessions Were Preceded By Oil Price Spikes – Damage To Saudi Oil Industry Could Take “Months” To Repair

When the price of oil rises dramatically, that tends to be really bad for the U.S. economy.  Because we are so spread out and goods are transported over such vast distances, our economy is particularly vulnerable to oil price shocks, and that is one reason why the events that we just witnessed in the Middle East are so alarming.  According to an article that was published by the Federal Reserve Bank of San Francisco in 2007, five of the last seven U.S. recessions that had occurred up to that time “were preceded by considerable increases in oil prices”.  Since that article was published in 2007, the recession that began in 2008 hadn’t happened yet, and of course, that recession was immediately preceded by the largest oil price spike in history.  So that means that six of the last eight U.S. recessions were preceded by oil price spikes, and now we may be facing another one.  It is being reported that it may take “months” for Saudi Arabia to fully repair the damage that was done to their oil industry, and that could fundamentally alter the balance of supply and demand in the global marketplace.

Yesterday, I discussed why high oil prices are so bad for our economy.  When the price of oil is too high, it can cause inflation and hurt economic growth simultaneously.  The article from the Federal Reserve Bank of San Francisco that I mentioned in the last paragraph tried to explain why this happens in very basic economic terms

Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

1 2 3 4
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.