Recovery (F)oiled

Over at the Atlantic, Derek Thompson picks up on some interesting arguments made by Jim Hamilton that I've been following for a while, namely, that the spike in oil prices last year was a major factor precipitating the global recession. I don't know if it's fair to lay the blame for the recession entirely on oil prices, but the case for a starring role seems sound to me.

The basic story is this: households were leveraged up to their eyeballs. Housing prices peaked and began falling, which turned off the home equity spigot, while rising oil prices destroyed household budgets, adding to the growing avalanche of indebted consumers unable to continue rolling over their debt. Enter the financial crisis, which forced further deleveraging and impacted the real economy, further harming households and financial institutions, and so on. I'm inclined to believe that some reckoning and recession was unavoidable (and the National Bureau of Economic Research says we were already in recession before the devastating doubling of oil prices in the spring and summer of 2008). Still the effect of oil prices on the economy, and particularly on the budgets of the most over-stressed households in the bubbliest exurban housing markets, shouldn't be overlooked.

So if there's something about the IMF report that really makes me nervous, it's their oil price estimates. Based on futures market figures, oil will average $52 per barrel this year, rising to above $60 per barrel in 2010. Exploration and production have taken a beating during the recession and credit meltdown, so any unexpected increase in global demand is likely to generate higher prices still. Those concerned that expensive oil helped get us into this mess ought to be concerned that we've done very little to prevent expensive oil from keeping us in it.