With the news today that gas prices have hit $6 per gallon in some areas of Florida – and a brief drive around the Los Angeles area will show you gas prices nearing the $5 range regularly – Americans may need to begin considering what they will do if the economy takes another nose dive.
This isn’t alarmism. Oil price rises of this magnitude have repeatedly done severe damage to the American economy, most recently during the summer of 2008. Economist James Hamilton of the University of California, San Diego, elucidates:
Big oil price increases that were associated with events such as the 1973-74 embargo by the Organisation of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by a global economic recession. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes.
Hamilton’s economic models suggest that we could have predicted the GDP for 2008 by looking at oil prices almost exclusively. His statistical model was so strong that he actually admitted he didn’t believe it himself.
The logic here is simple. When oil prices rise, Americans don’t have enough money left over to pay for other items. Raises in oil prices cause inflation in food prices and secondary industries. That, in turn, sucks even more disposable income out of the economy. Eventually, people don’t have the money to buy new houses or pay their mortgages – especially people who took out mortgages too large and were living paycheck to paycheck. Boom.
On January 5, 2007, the price of a barrel of light, sweet crude oil was $56.31. By July 4, 2008, it had almost tripled to $145.29. No wonder people were hurting.
After the economic catastrophe of September 2008, oil prices dropped all the way back down again to $36.51 in January 2009. They’re now the highest they’ve been since April 2011, at $103.24 – almost three times as high. We may be approaching another tipping point.
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