Rising Oil Prices and the Economic Downturn

In a recent testimony before the Joint Economic Committee of the U.S. Congress, economics professor  James D. Hamilton besides offering his analysis on the development behind the oil price surge between June’07 and June’08, and how that spike contributed both to the initial downturn as well to the magnitude of the problems our economy is currently facing, offered also his views on the recent uptick in oil prices and what that means for our economy in the short-term.

From Econbrowser: Will the recent uptick in oil prices undermine prospects for recovery from the recession? Retail gasoline prices have risen about 50 cents-a-gallon from their low in December. That takes away about $70 billion from consumers’ annual spending power, which is hardly helpful for the broader challenge of restoring household balance sheets to a level where spending could be expected to pick back up. But let me emphasize that although I believe that the initial spike in oil prices was an important element of the process that produced our current difficulties, we are currently at a point at which the multipliers and spillovers associated with the recession dynamic itself have become far more important factors than the price of oil….

Notwithstanding, the recent rise in oil prices again underscores the present reality of the long-run challenges. Even if we see significant short-run gains in global oil production capabilities, if demand from China and elsewhere returns to its previous rate of growth, it will not be too long before the same calculus that produced the oil price spike of 2007-08 will be back to haunt us again.

emphasis added

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