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The True Cause of Recessions: OIL
By Douglas A. Stansfield
Recently I had the opportunity to speak at the annual Pennsylvania Energy Festival (http://www.paenergyfest.com/) back in September of this year. I was asked to speak about the economic impact of our oil dependency and so I began researching this topic to see if I could draw some insightful conclusions.
My initial analysis looked at the recessions that have happened within my lifetime and since I am 45 years old that record goes back to the 1970s. There have been 5 recession since then until now and I wanted to see if Oil had anything to do with them, because deep in my heart, I knew the most recent recession was directly caused by the oil price spikes that started in 2007 and peaked in 2008.
This article will also show how the price of oil contributed to the current housing crisis as well but the responsibility of that problem has other root causes that will not be discussed here.
Let me first look at each of the past 5 recessions in order to better understand what was happening prior to those recessions.
All of the recessions listed above were caused by oil except the early 2000 recession that was caused by September 11th, 2001.
The 1973 to 1975 recession was the OPEC induced oil crisis and the first one since our Peak Oil event which occurred in 1970. For more information about the concept of Peak Oil please visit http://en.wikipedia.org/wiki/Peak_oil
OPEC quadrupled the price of oil and the US quickly fell into recession. This period in US history saw gas lines and severe unemployment and also a period (in which is atypical during a recessionary period), rising inflation.
The second recession I looked at was in the early 1980s. 1979 saw world oil prices skyrocket during the Iranian revolution and American Hostage Crisis and by the early 1980s the American Economy was right back into a recession. During this time the US government was trying to control very high inflation so they started raising interest rates to try and control inflation. Later on in this article you will see what the economic side effects are to this course of action.
The third recession I want to focus on was the early 1990s. This was mild in comparison to the prior two recessions however there was still high unemployment and raising interest rates. The fearless Federal Reserve inflation fighters where raising interest rates from 1986 to 1989 with little effect on economic activity. The economy was slowed by their actions but it didn’t stop the economy. It took the Iraqi invasion of Kuwait and the oil price rising from $21/barrel in August 1990 to $46/barrel by the middle of October. This increase in oil prices again pushed the economy into a recession.
The Early 2000 recession was caused by the events of September 11th, 2001 and this was the mildest recession of any of the ones listed on this page. Most economists believe that had 9/11 not happened the economy would not have slipped into a recession during this period.
The most recent recession this country has experienced officially started in December of 2007 and officially ended in June of 2009. Because most of the GDP that brought us officially out of that recession was the result of government spending, many economists believe we are still in this recession and that it will be a double dip recession. Time will tell.
Lets especially focus on the most recent recession and the price of oil and what that price has done to the American Economy. The Federal Reserve’s policy during these prior years is also suspect and a causal contributing factor to this recession. During 2006 Oil was trading around $60/Barrel for most of that year going up and down but for the most part the oil price had been trending up since 2004….but gradually.
During this period you have to look at the actions of the Federal Reserve. The Federal Reserve is responsible for US Monetary Policy. One of their core beliefs is that inflation should be kept under control to thereby keep the value of the dollar as constant as possible. This means that a dollar today will be worth a dollar tomorrow provided there is no inflation. The Fed reviews CPI data to determine if inflation is present in the economy and to see if the dollar is potentially losing value because of it. The CPI stands for the Consumer Price Index which is a market basket of consumer products prices that are monitored over time. As various products prices change, the Fed determines whether or not there is overall inflation in the economy. If the Fed believes inflation is present they will begin to raise interest rates in order to “slow the economy” to allow for a “soft landing”. What that really means is that they will make it more expensive for businesses and banks to borrow money. This is also referred to as the “tightening” of the money supply.
During 2004 and into 2006 the Federal Reserve was acting in the best interest of the American People by trying to control inflation. During this time they raised interest rates. By 2005 the Fed Funds Target Rate was 2.25% and then by the beginning of 2007 it was 5.25%. That is a 133% increase. This action resulted in a large percentage of adjustable rate mortgages interest rates to reset.
The effect of this was the current housing mess we have. It was a perfect storm because from 2001 to 2007 the oil price was gradually increasing and it was the only price in the CPI market basket that was increasing during that time. So the Federal Reserve in effect was trying to control the world oil price with the interest rate. One of the worst cause and effect actions ever taken as the result was the exact opposite of what they intended and the price of oil continued for 2 more years until the whole economy receded.
Between the Fed’s monetary policy and the world oil markets pricing the US economy could take no more and finally receded into recession in December 2007. The oil price continued to increase all the way into the middle of 2008. The amount of money the US economy shed during this recession was over $250 billion. Over $100 billion of that was the increase that America paid for about the same amount of oil in the previous year. So take the opportunity cost that this oil price increase caused and it is just short of being over ½ of the amount of money that was lost in GDP!
So what does this have to do with Electric Cars? Everything! According to the Electrification Coalitions Roadmap, if the Light Duty vehicle class was converted to Electric power we would see the amount of imported oil go to zero. It would save us close to 6 million barrels of oil a day which is enough to totally eliminate our need for imported oil!
We hold the power to reduce future recessions in our own hands. Start your Electric Car Conversion project today!!
About the Author
Douglas A. Stansfield is currently serving as President of the NJ Electric Auto Association and a member of the Board of Directors of the EAA and the East Coast Electric Drag Racing Association. He is also the President of Trans Atlantic Electric Conversionshttp://www.taec.co a full service parts and Electric Vehicle Conversions Shop.
By Douglas A. Stansfield
Recently I had the opportunity to speak at the annual Pennsylvania Energy Festival (http://www.paenergyfest.com/) back in September of this year. I was asked to speak about the economic impact of our oil dependency and so I began researching this topic to see if I could draw some insightful conclusions.
My initial analysis looked at the recessions that have happened within my lifetime and since I am 45 years old that record goes back to the 1970s. There have been 5 recession since then until now and I wanted to see if Oil had anything to do with them, because deep in my heart, I knew the most recent recession was directly caused by the oil price spikes that started in 2007 and peaked in 2008.
This article will also show how the price of oil contributed to the current housing crisis as well but the responsibility of that problem has other root causes that will not be discussed here.
Let me first look at each of the past 5 recessions in order to better understand what was happening prior to those recessions.
All of the recessions listed above were caused by oil except the early 2000 recession that was caused by September 11th, 2001.
The 1973 to 1975 recession was the OPEC induced oil crisis and the first one since our Peak Oil event which occurred in 1970. For more information about the concept of Peak Oil please visit http://en.wikipedia.org/wiki/Peak_oil
OPEC quadrupled the price of oil and the US quickly fell into recession. This period in US history saw gas lines and severe unemployment and also a period (in which is atypical during a recessionary period), rising inflation.
The second recession I looked at was in the early 1980s. 1979 saw world oil prices skyrocket during the Iranian revolution and American Hostage Crisis and by the early 1980s the American Economy was right back into a recession. During this time the US government was trying to control very high inflation so they started raising interest rates to try and control inflation. Later on in this article you will see what the economic side effects are to this course of action.
The third recession I want to focus on was the early 1990s. This was mild in comparison to the prior two recessions however there was still high unemployment and raising interest rates. The fearless Federal Reserve inflation fighters where raising interest rates from 1986 to 1989 with little effect on economic activity. The economy was slowed by their actions but it didn’t stop the economy. It took the Iraqi invasion of Kuwait and the oil price rising from $21/barrel in August 1990 to $46/barrel by the middle of October. This increase in oil prices again pushed the economy into a recession.
The Early 2000 recession was caused by the events of September 11th, 2001 and this was the mildest recession of any of the ones listed on this page. Most economists believe that had 9/11 not happened the economy would not have slipped into a recession during this period.
The most recent recession this country has experienced officially started in December of 2007 and officially ended in June of 2009. Because most of the GDP that brought us officially out of that recession was the result of government spending, many economists believe we are still in this recession and that it will be a double dip recession. Time will tell.
Lets especially focus on the most recent recession and the price of oil and what that price has done to the American Economy. The Federal Reserve’s policy during these prior years is also suspect and a causal contributing factor to this recession. During 2006 Oil was trading around $60/Barrel for most of that year going up and down but for the most part the oil price had been trending up since 2004….but gradually.
During this period you have to look at the actions of the Federal Reserve. The Federal Reserve is responsible for US Monetary Policy. One of their core beliefs is that inflation should be kept under control to thereby keep the value of the dollar as constant as possible. This means that a dollar today will be worth a dollar tomorrow provided there is no inflation. The Fed reviews CPI data to determine if inflation is present in the economy and to see if the dollar is potentially losing value because of it. The CPI stands for the Consumer Price Index which is a market basket of consumer products prices that are monitored over time. As various products prices change, the Fed determines whether or not there is overall inflation in the economy. If the Fed believes inflation is present they will begin to raise interest rates in order to “slow the economy” to allow for a “soft landing”. What that really means is that they will make it more expensive for businesses and banks to borrow money. This is also referred to as the “tightening” of the money supply.
During 2004 and into 2006 the Federal Reserve was acting in the best interest of the American People by trying to control inflation. During this time they raised interest rates. By 2005 the Fed Funds Target Rate was 2.25% and then by the beginning of 2007 it was 5.25%. That is a 133% increase. This action resulted in a large percentage of adjustable rate mortgages interest rates to reset.
The effect of this was the current housing mess we have. It was a perfect storm because from 2001 to 2007 the oil price was gradually increasing and it was the only price in the CPI market basket that was increasing during that time. So the Federal Reserve in effect was trying to control the world oil price with the interest rate. One of the worst cause and effect actions ever taken as the result was the exact opposite of what they intended and the price of oil continued for 2 more years until the whole economy receded.
Between the Fed’s monetary policy and the world oil markets pricing the US economy could take no more and finally receded into recession in December 2007. The oil price continued to increase all the way into the middle of 2008. The amount of money the US economy shed during this recession was over $250 billion. Over $100 billion of that was the increase that America paid for about the same amount of oil in the previous year. So take the opportunity cost that this oil price increase caused and it is just short of being over ½ of the amount of money that was lost in GDP!
So what does this have to do with Electric Cars? Everything! According to the Electrification Coalitions Roadmap, if the Light Duty vehicle class was converted to Electric power we would see the amount of imported oil go to zero. It would save us close to 6 million barrels of oil a day which is enough to totally eliminate our need for imported oil!
We hold the power to reduce future recessions in our own hands. Start your Electric Car Conversion project today!!
About the Author
Douglas A. Stansfield is currently serving as President of the NJ Electric Auto Association and a member of the Board of Directors of the EAA and the East Coast Electric Drag Racing Association. He is also the President of Trans Atlantic Electric Conversionshttp://www.taec.co a full service parts and Electric Vehicle Conversions Shop.