Theory of oil-shock recession

…His paper argues: “The evidence to me is persuasive that, had there been no oil shock, we would have described the US economy in fourth-quarter 2007 to third-quarter 2008 as growing slowly, but not in a recession.”

Other economic models do not come up with such a powerful role for oil. But, given the central importance of events such as the steep fall in vehicle sales, the general slowdown in consumer spending and the plunge in consumer sentiment in the first half of 2008 – all of which are strongly influenced by petrol prices – it does not seem implausible to think that the cost of oil was a critical factor in the downturn.

However, in case anyone was tempted to think of the oil price as yesterday’s problem, Prof Hamilton has a warning for the future.

“Some degree of significant oil price appreciation during 2007-08 was an inevitable consequence of booming demand and stagnant production . . . If growth in the newly industrialised countries resumes at its former pace, it would not be too many more years before we find ourselves back in the kind of calculus that was the driving factor behind the problem in the first place.”

FT.com