Economics: How The 2010s Benefited From Cheap Oil

 

(Drivebycuriosity) - The 2010s were a decade without a recession, continuous economic growth, a record low jobless rate & strong stock market gains. The splendid performance is partly due to relatively cheap & stable oil. The price of oil ended the decade where it started (charts below).

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Apparently the 2010s were a revival of the period 1980-1999. Then cheap oil (except 1991 when the oil price hiked caused by the first Iraq war) fueled 2 decades of prosperity and the Dow Jones multiplied with the factor 10. It appears that decades with cheap oil are prosperous, decades with expensive & volatile oil (like the 1970s and the 2000s) are not.  "Rapid increases in the price of oil have preceded almost all U.S. recessions" ( marginalrevolution  the article has a link to a study by Prof. Hamilton). You can see this in the chart below which shows oil price development & recession.

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The causal connection between oil and recessions can easily explained. Americans depend on gasoline. Many live in suburbs and need to drive to go to work, to shop & to spend leisure time. High gas prices curb their available income. It is not surprising that high gas prices constrains consumer spending. 

"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. 

Why was oil cheap in the 2010s? Around the years 2012-14 Opec and the unruly middle east region, which had caused a lot oil crisis in the past, lost their power. Then US oil production started a steep rise, thanks to fracking (chart below). Today the US is much less dependent from the unreliable Opec oil deliveries than in the 2000s.  

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I believe that fracking & the rise of electric cars will tame oil prices in the new decade and will allow prosperity to continue.

Stay tuned