Economics: Oil - It Looks Like 2008 Again

  

(Drivebycuriosity) - It looks like 2008 again (chart above source ). Then the rally led to the most severe recession in decades, known as "The Financial Crisis".  

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 infamous 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). "Rapid increases in the price of oil have preceded almost all U.S. recessions" ( marginalrevolution ).

Today´s oil price shock is caused by Putin´s invasion of the Ukraine, the risk that the war escalates and reduced oil deliveries from Opec partner Russia. The Biden administration is talking about banning oil imports from Russia, pouring gasoline into the fire.

 

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But the oil price rally started long before the Ukraine war (chart above). The oil price followed the recovery from the Covid-19 pandemic which raised the demand for energy.

A while ago I was sanguine with rising oil prices because I believe in stabilizing power of US fracking. US  fracking exists for many decades, but it really took off around the year 2012 thanks to technological progress (wikipedia). As a result US production of oil & natural gas rose sharply and the US became the world`s largest oil producer. Fracking helped the US to overtake Saudi Arabia as oil producer, reduced the power of Opec significantly and stabilized the global supply of energy.

 

 

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The ascent of US fracking let to an oil price drop in 2014 and kept oil cheap till 2020. During the pandemic, which reduced the oil demand considerably, fracking got reduced. I hoped that fracking - and with it US oil production - would recover together with the ailing economy. But it did not. The recovery of US production was subdued as best (chart above  ). 

This is the result of current US politics. The Biden administration is strictly anti fossil energies and anti fracking (atr.org ). Biden dealt a major blow to American energy independence with his Executive Order banning new oil and gas development on federally owned territory ( atr). The President also anounced several tax increases on American energy production. 

The anti fracking stance of US government discourages investments in US oil production and curbs US oil production. The result is today´s oil price spiral which could slow down economic growth and might even cause the next recession.