Jeff Rubin and Peter Buchanan of CIBC World Markets wrote a fascinating report where they claim that the key driver behind the global recession may be the 500 per cent increase in oil prices. It's interesting to note that Americas' cost of importing oil is up US $200 Billion a year.
They claim, by any benchmark the economic cost of the recent rise in oil prices is nothing short of staggering. A lot more staggering than the impact of plunging house prices on housing starts and construction jobs, which has been the most obvious brake on economic growth from the housing market crash. And those energy costs, unlike the massive asset writedowns associated with the housing market crash, were borne largely by Main Street, not Wall Street, in both America and throughout the world.
They compare the most recent "oil shock" to the oil shocks that preceded the last five recessions. And they, correctly, find it curious that a 500%+ increase in the real price of oil gets virtually ignored as a culprit behind today's economy, eclipsed by the ongoing crisis in financial markets.
This oil shock has created a redistribution of global income from oil-consuming countries (like the USA - basically a zero-savings-rate economy) to oil-producing countries (like Saudi Arabia - a 50%-savings-rate economy).When you consider that the USA imports over 80% of the oil they consume, that represents a lot of household income that is transferred to non spending economies which means less and less of the world's income gets spent. The result is a weaker worldl economy.
They conclude that given that oil pices took off in the thrid quarter of last year, after several years of more gradual increases, we should expect to see its maximum hit on the economy right about now. By the same token, however, the impact from even larger declines in oil prices over the last two quarters should give its maximum boost to the economy moving into 2009.
If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it.
Click here to read the whole report.
