Prof. Hamilton has an interesting post that argues that we are now seeing another oil shock like we say in 1973-74 (oil embargo), 1978 (Iranian Revolution), 1980 (Iran-Iraq war), and 1990 (first Persian Gulf war). Prof. Hamilton notes that in all cases the run up in oil prices was followed by a recession. Now, using recent data we see that we are again facing a very similar run up in oil prices.
However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true.
Another reason consumers had been largely shrugging off the oil price increases of the last few years is that they could afford to do so, since energy expenditures had fallen so significantly as a fraction of total income. However, as a result of rising oil prices, that, too, is no longer the case.
Prof. Hamilton compiles additional evidence that the price of oil is possibly coming to a turning point. The dollar value of U.S. crude oil consumed as a fraction of GDP, the number of vehicle miles traveled, the consumption of gasoline, and the sales of SUV. All of these time series point in the same direction: consumers are reacting to the run in the price of oil, and in a way that could be lead to a recession. He also notes that Continental, Delta, United and American Airlines are all cutting jobs in response to higher oil prices. Factor in the problems in the real estate/housing market and it doesn’t bode well for the economy.
