While many people are cheering the revolts going on throughout the Middle East and shudder at the horrible violence few people are discussing the possible effect that these revolts will have on the world/US Economy. Should these revolts continue to spike up the cost of oil, the world will be thrown into an economic crisis worse than the recession that began in 2007.
Certainly the crash of the sub-prime housing boom, which was caused by the progressive belief that owning a home was a right, is the primary reason behind the financial crisis and what was to become known as the “great recession.” The part that most people forget is that the “pin” that pricked the housing bubble, and led us down the economic abyss was oil prices. In fact every rescission we have had since the mid-1970s has shown an accompanying spike in oil prices. It is not a coincidence that the worst recession in that period has been accompanied by the largest oil price spike.
Economist Jeffrey Rubin said in 2008:
Curiously, an over-500% increase in the real price of oil gets virtually ignored as a culprit behind today’s economy, eclipsed by the ongoing crisis in financial markets. Yet the run-up in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock. And those oil shocks produced two of the deepest recessions in the entire post-war period, including the 1980-82 double dip.
The price of oil influences more than just how you heat your house or drive your car.
Since most manufacturing uses oil in at least some of their manufacturing process, even if it just to get product to the market, when the oil began to spike in 2006, people who could barely afford their mortgages began to have to choice between their bank payments or basic staple items whose costs were driven up by their energy costs. A few months later, when the price increases led to interest hikes in existing mortgages, the house of cards holding up the housing market collapsed.
Crude Oil prices peaked during the summer of 2008 as it hit $145 in July 2008. Prices began to fall immediately after President Bush lifted the executive ban on offshore oil drilling on July 14th. By the end of December 2008, crude oil spot price fell to $30.28 a barrel. Its interesting that just the threat of new drilling drove down costs.
During the past two years prices has slowly risen to the middle $80s per barrel, but with the beginning of the protests in Egypt the cost began to rise more sharply and this week, with the increased violence in Libya which produces 2% of the world’s oil supply (and has the most significant reserves in Africa) prices spiked from $86.15 four days ago to over $100:
Oil prices continued to rally Thursday, pushing stocks lower in Europe and Asia amid fears that the unrest in Libya could spread to other major Middle East producers.
The benchmark light, sweet crude futures contract touched the key $100 a barrel level in New York on Wednesday for the first time since September 2008. On Thursday, the April contract was at $100.95, up $2.85, in pre-market trading.
Even before the Middle East protests began, Jeffrey Rubin was warning about the increase in oil prices:
Oil prices caused the last recession, and oil prices will cause the next one as well. Energy inflation is already on the march. In fact, this time around oil prices are rising much earlier and much more rapidly than they did last cycle. Inflation is already running at nearly a five per cent rate in China; as oil prices go on to set new record highs, it’s only a matter of time of before we see those inflation rates in North America and in the rest of the OECD.
If the price spiked over $100/a barrel from Libya just imagine what will happen when the wave of protests reach Saudi Arabia (there are already calls on Facebook for protests against the Saudi Government the third week of March). Should that occur the $145/barrel price of 2007 will be a very fond memory.
The oil spike in 2007/8 took down what was then a strong US economy. Should a similar or worse spike happen now, while the economy is barely keeping its head above water the United States may face and economic disaster worse than what was caused by the crash of the housing bubble.
All this is happening while the United States sits on a major oil reserve. A 2009 study by the non partisan Congressional Research Service (CRS) sheds light on America’s energy resources. It shows show the U.S. supply of recoverable oil to be 167 billion barrels of oil, the equivalent of replacing America’s current imports from OPEC countries for more than 75 years.
Sadly, the progressives in Congress and the White House, refuse to open up our reserves to drilling–in fact we have gone backwards. One of the Obama administration’s first moves was to cancel contracts to exploit our shale oil reserves:
Interior Secretary Ken Salazar has canceled leases for energy exploration on 77 parcels of federal land in Utah, confirming that this White House is indeed a Small Oil administration.
The previous administration, which was not beholden to environmental special interests and seemed to understand the importance of energy, had released 130,000 acres of largely uninhabited — and uninhabitable — land for oil and gas exploration.
Some of the parcels are in or near the Green River Formation, an oil-rich region in Colorado, Utah and Wyoming that has the largest known oil shale deposits in the world, holding from 1.5 trillion to 1.8 trillion barrels of crude.
The over-reaction to the BP oil spill, a hiatus of all offshore drilling, and the follow-up rules changes represents another retreat from exploiting our own natural resources.
As the United States continues to struggle through a weak, jobless recovery we are approaching the next economic crisis caused by higher oil prices, a crises whose start date has been moved forward due to the unrest in many of the Arab Middle East countries.
Sadly, even if we survive the coming economic collapse, we are doomed to confront collapses over and over, until we begin to search for and exploit our own energy reserves.
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