Economics: Do We Approach The Next Oil Crisis?

(Drivebycuriosity) - Oil prices are on a tear again. Brent Crude, the gauge for the global oil market, climbed 50% in the recent 12 months and  tripled since early 2016 (brent). The new oil price spike is scary and reminds me of the oil price jump in 2007/08 (charts below). A study by Prof.  Hamilton, University of California, San Diego, 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. 

Oil price hikes also caused recessions in the 1970s - the oil or energy crisis - and in the year 1990. Nine out of ten of the U.S. recessions since World War II were preceded by a spike up in oil prices, writes Prof. Hamilton ( pdf econweb).

The new oil price rally is driven by speculation. Hedge funds and other speculators are betting on oil supply disruptions because of the Iran sanctions, the crisis in Venezuela and other issues. There is the risk that the oil price rally gets out of control - as in 2008. Rising oil prices attract more buyers - the momentum players - who are betting on further price gains. This herd behavior is driving prices even higher - a self-fulfilling prophecy. The process can escalate and create a snow ball effect - rising oil prices cause further price rises - till the system implodes.

But there is a good chance that we could avoid this fate. Fortunately the US oil production is rising  - thanks to fracking. Climbing oil prices make more oil wells profitable - and also more offshore drilling -  which could lead to an over-supply and the bubble may pop again - as it did in 2014. Time will tell.