Do Higher Oil Prices Lead to Recessions? (Yes)

Nothing to see here folks. No worries about oil prices at all. Move along . . .

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WSJ: “High oil prices have preceded or coincided with nine of the 10 U.S. recessions since World War II — a history lesson that has policy makers, executives and economists scouring for evidence that it could happen again.

So far not many see reason to believe that the strengthening U.S. and global economies are at risk of sliding back into recession. What they do see is an accumulation of anecdotal evidence that the long streak of record-high nominal oil prices is taking a creeping toll in places. Some economists say history shows it won’t take long to see a broader drag on the economy if energy prices remain at these levels or move higher.”

“Yet an energy-induced slowdown could well be contained. Industrialized economies like the U.S. are less dependent on oil and other energy products today than they were in the past, and energy expenses are a smaller part of most household budgets. Oil hit the equivalent of more than $70 a barrel in current (2004) dollars during the crisis of the 1970s.”

Energy-price shocks can hurt an economy in different ways. First, they sap the disposable income of consumers, eroding their ability and willingness to spend on other goods and services, like cars or summer vacations. In the U.S., household spending on durable goods has tended to slow or decline in the past when energy outlays have risen sharply. Price shocks also can squeeze corporate profit margins, reducing the incentive of companies to invest and hire. And they can force consumers and businesses to make shifts — such as switching to more fuel-efficient cars — that can undermine the economy’s productivity during the transition.”

Source:
Oil Prices Start to Pinch, Stirring Concern Over Economic Impact
Jon E. Hilsenrath and Marcus Walker
Wall Street Journal, June 4, 2004; Page A1

http://online.wsj.com/article/0,,SB108630315565628545,00.html

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