Michael Ewens

Will the recent uptick in oil prices undermine prospects for recovery from the recession?  Retail gasoline prices have risen about 50 cents a gallon from their low in December.  That takes away about $70 billion from consumers’ annual spending power, which is hardly helpful for the broader challenge of restoring household balance sheets to a level where spending could be expected to pick back up.  But let me emphasize that although I believe that the initial spike in oil prices was an important element of the process that produced our current difficulties, we are currently at a point at which the multipliers and spillovers associated with the recession dynamic itself have become far more important factors than the price of oil.  The problems faced by U.S. automakers at the moment– and those problems are very, very daunting– are not caused by the price of gasoline.  What is needed to restore U.S. vehicle sales now is not lower gas prices but instead more income, jobs, and confidence on the part of consumers.

 Notwithstanding, the recent rise in oil prices again underscores the present reality of the long-run challenges.  Even if we see significant short-run gains in global oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007-08 will be back to haunt us again.

James Hamilton explains that the increases in oil prices from 2006 – 2007 go a long way towards explaining our current recession.