Economics: Will Saudi Arabia`s Oil Strategy Cause A New Recession?

(Drivebycuriosity) - The US economy seems to be in a good shape. But there is a growing danger - the climbing oil price. Oil is getting more expensive because there is more demand thanks to a stronger global economic growth. The oil price rally is also fueled by many hedge funds who are betting on climbing oil prices and are buying futures on the financial markets. But the main culprit is Saudi Arabia and their OPEC gang, who have reduced oil production in order to achieve higher prices.

"Thanks to OPEC-led production cuts, crude prices are double their level two years ago", writes Bloomberg  (bloomberg). And Saudi Energy Minister Khalid Al-Falih wants to go even further. According to Bloomberg he declares that the oil producers should keep cutting for the whole year, even if it causes a small supply shortage, Al-Falih said. “If we have to overbalance the market a little bit, then so be it,” he told reporters in Riyadh last week (opec).

Unfortunately the US economy is very sensitive to oil prices. It seems that the Americans are addicted to driving and gasoline consume. In January the US retail sales already dropped because Americans spend more money on the gas pumps and bought less other goods & services. If the oil price rises to fast and too high the damage could get worse.



                                               Nine Out Of Ten  Recessions


Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, writes Prof. James D. Hamilton, University of California, San Diego ( pdf econweb). Another study by Prof.  Hamilton shows that the oil price shock from 2008 - from summer 2007 through July 2008 the oil price spiraled from about $50 to $147 -  turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

Other researchers came to the same results: "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice). Low income suburban homeowners suffered most from the rising gas prices.  Poor homeowners are called "subprime" and their delinquencies are known as "subprime crisis."

We are still far away from the danger zone, which certainly hovers above $100. But history also shows that oil price rallies attract speculators, including hedge funds, who purchase oil futures on the financial markets as a bet on further price gains, the so-called momentum players. Their herding behavior causes snow ball effects like the oil price spike of 2008.

But there is hope. The US oil production is rising - thanks to fracking (cnbc). There is a chance that the US oil production is able to compensate the reckless strategy of the Saudis and their OPEC gang and avoid the next oil crisis.