Jeff Rubin – The recession: First, there was expensive oil

If indeed oil, and not subprime mortgages, lies at the heart of our current economic malaise, we may be sicker than we know

Knowing the nature of a disease is usually a precondition for finding a cure. Similarly, identifying the cause of a recession goes a long way in defining what type of recovery is likely to follow.

Conventional wisdom ascribes the current downturn, which in many ways is already the postwar’s deepest one, as a financial-market crisis with origins in the bursting of a U.S. real estate bubble. But how did the demise of the American subprime mortgage market create earlier and much deeper recessions overseas than in the U.S. economy itself?

Maybe there was something else going on, like triple-digit oil prices for example.

If past oil shocks, like the two OPEC ones, created deep world recessions, why wouldn’t the biggest oil shock of all be a logical suspect for triggering today’s recession? The increase in oil prices that preceded the current recession, even in inflation-adjusted terms, was more than twice as large as the OPEC shocks.

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