By Abel Ashes 8/4/09
Perhaps the most overlooked aspect of the current recession is the role that oil prices played in bringing about the economic crisis. Often forgotten in all of the talk of credit default swaps and real estate bubbles is the fact that shortly before the economy began to go into a steep decline the nation was facing nearly $150 dollar per barrel oil and nearly $5 per gallon gasoline.
Neither the oil issue nor the real estate issue worked in isolation to cause the current recession, but rather exacerbated one another making the economic meltdown inevitable. With so much of new home ownership concentrated in areas of suburban sprawl where gas guzzling SUVs were the norm and the prevailing culture encouraged the use of homes “as ATMs” the effects of gasoline prices on households alone had potential to send the economy into a tailspin. However, when one considers the effects of high oil prices on industry we can clearly see that recession may have happened whether or not the real estate bubble had burst. In fact the high oil prices may have been the prick that finally burst the bubble.
Just as an entire neighborhood suffers the after effects of the foreclosures of neighbors in declining home values, so to does the entire nation suffer the after effects of high oil prices due to cost increases being passed on to the consumer as well as the potential of lay-offs and business closings due to out of control business expenses. These expenses can manifest themselves as cost increases in mining, logging, manufacturing, farming, packaging, and transportation of goods. In fact many of the employment sectors to suffer first were those heavily dependant upon low oil prices to sustain profitability; such as trucking, airlines, non-organic farming, and construction.
Concurrent with the recession triggering oil price increases of July 2008 was the arrival of a record setting world crude oil production level of 74.8 million barrels per day. In other words, while oil prices may have risen due to a variety of factors, the most essential was obvious; oil demand was feared to be approaching a level in excess of available supply.
Just as elements of the real estate market were aware of the potentially devastating bubble they helped to create, individuals and institutions involved in world oil markets were playing dangerous games designed to maximize profits in the short-term at the expense of long-term stability. The real estate sector was devastated by a perfect storm of greedy speculators, deceptive appraisers, manipulative home loan officers and self-delusional home owners. The industries and individuals most reliant upon low oil prices were dealt a heavy blow by a combination of petroleum geology, excess consumption, geopolitics, and oil price speculation. The most important factors in this stew will prove to be petrol-geology and excessive consumption. In fact it can be stated that geology and consumption are the factors driving petrol-politics and petrol-speculation.
As the economy fell deeper and deeper into a recession, production slowed, trucking slowed, shipping slowed, air travel slowed, and people drove less. The price of oil dropped due to less oil being purchased. This substantial drop in oil prices will prove to be one of the most important factors leading to economic recovery, a sobering thought considering that economic recovery will likely mean a return to high oil prices.
The only hope of getting off of the oil price rollercoaster in the short-term is if individuals, industry, and government recognize that conservation of energy must increase, while consumption and growth driven economics decreases. Absent that sort of miraculous transformation of the American mindset our next best short-term hope is that strong regulation of financial markets will be instituted to, if not eliminate, then severely rein-in the type of irresponsible speculation that leads to boom and bust economic cycles. If the rest of the economy is built on a strong foundation of realistic expectations we will be better situated to absorb the shock of future oil price spikes while sustaining less damage to the economy.
Our greatest hope for economic stability in the long-term is that the issue of future energy supply decreases combined with the equaling frightening prospect of economic and ecological destruction due to global climate change will break through the fog of ignorance and denial and lead to a massive, rapid, and sustained global push for clean, sustainable energy that develops the most cutting edge renewable energy technologies beyond the “alternative” stage and into the mainstream of energy consumption where they belong.