The Oil Price Shock: Are We Bound for Another Global Recession?
The high oil prices of the last few weeks have led to concerns about a U.S. and global growth slowdown. Most analysts believe that the oil shock may slow down U.S. growth and growth in oil importing countries, but that it will not lead to another U.S. and global recession. But, the last four U.S. and global recessions in the last three decades have been associated with oil price shocks driven by political shocks: the Yom Kippur War of 1973 led to the global recession of 1974; the Iranian Revolution of 1979 led to the recession of 1980; the 1990 invasion of Kuwait by Iraq led to the 1990-91 recession; and part of the late 2000 slowdown and 2001 recession was exacerbated by the 2000 oil shock where Middle East tensions (the second Palestinian intifada) and other factors led to a spike in the oil price in late 2000. Even the spike in oil prices in early 2003 (right before the latest Iraqi war), while not causing a recession, contributed to the significant economic slowdown of the first half of 2003. Thus, shouldn’t we worry that the latest spike in oil prices will cause another U.S. and global recession? As in any economic argument, you can give your two-handed answer as this price shock has similarities and differences relative to other episodes where a recession did follow the shock. But there are many reasons to worry that analystis are again underestimating the impact of the latest oil shock. Yes, we are sort of less dependent on oil than in the 1970s; yes, real oil prices are lower now than in the two 1970s shock. But there are many other reasons why this latest oil shock may have a larger impact on growth than expected by most. I flesh out these arguments in more detail in my recent paper with Brad Setser “The Effect of the Recent Oil Price Shock on the US and Global Economy” (August 2004). In summary, oil shocks have been underestimated in terms of their impact in the past; and they may be underestimated again today.
Thus, Caveat Emptor!!! And for more news and analyses on the recent oil shock see the section of my Global Macro homepage on The Oil Crisis.
2 Responses to “The Oil Price Shock: Are We Bound for Another Global Recession?”
Rafael Romero • August 16th, 2004 at 7:29 pm
Right now i am making a paper about the differents kind of shocks for a small country like Peru. The goverment of Peru have a mechanism in order to fight against the high oil price but is unsustaineble fiscally. I think that the most important efect for a small economy like ours is by the minus rate growth as effect of the high oil price because there is a high correlation between the american economy and the peruvian economy
sizepro • June 4th, 2005 at 3:00 pm
I agree with you about the way you view the issue. I remember, long time ago, Jack London said something like “Everything positive has a negative side; everything negative has a positive side.” I also find it interesting to see different points of views and learn useful things in the discussion. Posted by: Richard Hill at June 04, 2005 08:59 AM
