Wednesday, February 23, 2011

Oil Prices and Recessions

With oil spiking, it seems appropriate to look to an expert on the effect of oil shocks on the economy. In the blogsphere - and the real world -- there is no better expert than Professor James Hamilton at Econbrowser. Here is a link to a piece that shows the very strong relationship between oil shocks and economic recessions. The link also contains another link to a paper written by Professor Hamilton on the subject. For those of you who can't wait, here is the conclusion:

I've just completed a new research paper that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper's summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession.

I would also strongly recommend searching their website for "oil" as there are several other posts worth reading on the topic. Here are two:

How much are gasoline prices weighing on consumers?

Brent-WTI Spread

Finally, from a real world perspective, Libyan oil production may have already shut down at least 350,000/BBL/Day of production although, a shut down of 500,000 is not unlikely.