The recession question

The Baltimore Sun

Oil prices, which a year ago were as low as $50, hit $100 a barrel for the first time the other day. U.S. Federal Reserve Chairman Ben S. Bernanke and others have warned that high oil prices could seriously damage the U.S. economy. After all, oil price spikes have preceded most U.S. recessions since the 1970s. That includes the price spikes after the 1973 Arab oil embargo, the 1979 Iranian Revolution and the 1980 outbreak of the Iran-Iraq war.

Is an oil-induced recession on the way? Probably not. For starters, the 1970s oil price shocks were triggered by severe supply disruptions generated by "geopolitical events" - wars, embargoes, revolutions. In contrast, oil prices over the past year have spiked despite no significant supply disruption. Many people point to Iraq, but Iraq today is producing nearly as much oil as it did under Saddam Hussein.

Studies show that oil shocks driven by supply disruptions cause serious economic damage because they push consumers and firms to reduce consumption much more than shocks caused by other factors.

Consumers and others may have also learned from past experiences. Oil shocks are, well, less shocking than they once were. Partly as a result, buyers and sellers are not hoarding oil as they did during the oil crises of the 1970s. Nor do we see the type of public agitation that used to become visible when oil prices reached $70 or $80 per barrel.

Monetary policy also has changed. The Federal Reserve has been cutting interest rates, and that has helped stem the impact of high oil prices. Also, the International Energy Agency, which did not exist during the 1970s Arab oil embargo, now has rules, norms and the experience for managing oil crises. The agency requires its members to hold oil reserves equal to 90 days of their oil imports.

At the global level, world economic growth is stronger today than during previous oil price spikes, and that appears to be buttressing the American economy. We also need less oil today to produce the same amount of economic output. We have become more efficient in using this resource, so price spikes hurt less today than in the past.

It is still not certain that the U.S. can avoid a 1970s-style recession. We shouldn't become complacent. High oil prices do hurt, and that pain should remind us all of the crucial need for greater oil independence.

Steve Yetiv, author of "Crude Awakenings," is a political science professor at Old Dominion University in Virginia. His e-mail is Lowell Feld, an economist, worked for the U.S. Department of Energy for 17 years.

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