[Rocketmaker10000]

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.

 

[PhantomPholly]

Your analysis is flawed, because a) you did not consider all the facts and b) you are working from flawed assumptions.

First, the primary facts you overlooked. America is broke, and the total tax burden, both on individuals and on businesses, is higher than at any time in the history of our country. No, don't even think to spout that "income taxes were once higher." That is a specious argument, granted, but the reality is that no one paid those high rates. Nor does the Federal Income Tax comprise the totality - nor, I would argue, even the bulk of - our total tax burden. The sum totality of taxation is always the same as government spending - it's just that "where it comes from" is disguised, giving lawmakers endless excuses for why "things aren't so good."

In the history of our country, at only two times did PEAK spending by government exceed our STEADY STATE spending today. Those times were the last few years of WWII and the peak year of the Korean war. Just 4 years of such spending in WWII nearly bankrupted our nation - and now we wonder why everyone feels impoverished? There is no mystery here - even the greatest Dunce alive, were they to study history, could not miss that in 5,000 years of written history every time government spends to excess the people suffer. It is simply another form of slavery, pretending to be a form of good.

As for your flawed assumptions - you state erroneously that from 2004-2006 the Fed was acting in the best interest of the American people. Poppycock. The Fed is nothing more than a Ponzi scheme, both illegal and Un-Constitutional to anyone with a mind to bother to read that document. By definition they have NEVER worked to the best interests of the American people - rather, they have worked to maximize the profitability to their shareholders at the EXPENSE of the American people.

You are no doubt a good person at heart and truly believe that EVs are the future. In that you are right. Stick to what you know, and stop inventing excuses for the corrupt people who now inhabit the halls once created by persons devoted to freedom and human dignity.

 

[Rocketmaker10000]

Dear PhantomPholly,

I agree with you that the government has spent too much money. We aren't exactly broke yet however. Last time I checked (and I'm really tired now) our National spending was at 46% of our Gross Domestic Product. Which means, that if the government taxed and confiscated 1/2 of our domestic output then our budget would be balanced. Now that would truly kill whatever is left of the economy so we "mortgage" ourselves by selling government backed debt. Now the Federal Reserve is buying the debt which thereby reduces our dollars overall value because in effect we are increasing the money supply.

Now you state that my analysis if flawed because I didn't include all the facts. My facts are still facts and they correlate to the economic reality so my analysis is still true and I didn't want to write too much as no one will read it but yes, your point is well taken that our government has spent way too much money, and the Federal Reserve doesn't act in America's best interest often. I was meanly stating that those where the reasons the Federal Reserve states to justify their actions. I believe I was proving that the Fed doesn't act in our best interest, nor does the government by continuing to spend too much money.

Oil price spikes hurt our country. There is no disputing that in my view. Please understand that I have a Finance Degree and I'm not the only one saying this either.....http://www.youtube.com/watch?v=smRo7UFUuwM

 

[PhantomPholly]

Oil prices can impact our economy to be sure, but they could not cause a recession if our fiscal policy were not based on a stack of lies.

The problem with "Gross Domestic Product" is that it is a fake number invented to try to legitimize "Keynesian economics" - which is in fact not science but a colossal Ponzi scheme. By including 100% of government spending, GDP allows government propagandists to understate the true tax levels. There are many arguments about what the "right" percent of government spending is to include in such a figure, but if you count 1/2 of government spending (which is, by and large, representative of "non-productive" effort) you realize that our total TAX rate is well over 50%. Add to that the hidden taxes of inflation and bogus "debt" (we pay interest for the privilege of printing our own money? Puh-leaasse...) and a picture emerges that shows clearly why, despite the fact that Americans are more productive per capita than humans anywhere at any time in history, our standard of living is declining.

So, when I said you weren't using all the facts I was referring to the fact that, had our government not been sticking it too us for decades at levels of theft virtually unheard of in history, the OPEC oil bit would have been merely a bump in the road. Likewise, had our economy not been so weakened by the massive drain on our wealth again caused by corrupt government, and had a combination of policies many believe were purposely designed to further weaken the economy not resulted in the housing bubble, we would still be enjoying the prosperity of the late 90s.

As for Degrees - no offense, but it has been pointed out repeatedly how "those who know" have a track record of about 0% in predicting the major shifts in our economy. A better way to judge these things would be to study history - and history clearly shows that governments which spend too much and print faux money and pull other shennanigans to disguise their true level of theft ALWAYS result in bad economies. The straw that breaks the camel's back that make it into the news is just that - only the poor sucker who gets blamed for the Ponzi scheme's inevitable collapse.

 

[Rocketmaker10000]

PhantomPholly,

I am not going to try and become an apologist for government spending. It has been out of control for decades. I agree with you that is not good for our standard of living. I'm not sure why we are in a disagreement here. Paying to much to the government is a problem and so is being addicted to a commodity like oil. I stick by my point that the price spikes hurt our economy. The overspending by government does as well. Check out Zimbabwe history and wonder how they ended up in such a mess? Bad government leads to bad outcomes.

Both oil price spikes and our addiction to it plus bad government spending is all bad in my view. I'm not trying to be a contrarian with you. Surely if you are on the DIY Electric Car board you must be into Electric Cars. Maybe not for the same reason I am but still a common ground to start from wouldn't you say?

 

[PhantomPholly]

I'm not disagreeing with any of your facts - I just felt that what you left out was significantly more important than the factors you described as "the cause." Bad information, or partial information, makes it more difficult to get people to put pressure on Congress to address actual causes when their preference is to distract and simply make bigger messes.

Cleaning up our act, both literally and economically, are valid ends unto themselves, so you will get no disagreement there.

 

[studbike]

"Stick to what you know, and stop inventing excuses for the corrupt people who now inhabit the halls once created by persons devoted to freedom and human dignity."

I'm surprised Doug responded to you at all. Did you know George Washington? Maybe he was a scumbag. The revolution was about freedom from taxes. There was nothing humanistic about it, and there was never a time when politicians were "devoted to freedom and human dignity".

"The sum totality of taxation is always the same as government spending - it's just that "where it comes from" is disguised, giving lawmakers endless excuses for why "things aren't so good." No. The part that's disguised is where it goes. Recently the sum of taxation has been different (less) than the total of government spending... That's why we are where we are.. And it needs to continue to be different... it needs to go from less to more. There is only one way out of this crisis: both raise taxes and cut spending. But the dems refuse to cut spending, and the repubs refuse to raise taxes, because otherwise they would not be representing their voters. So they both continue to dig us deeper in to the hole. To be fair, recently the dems have been making SOME spending compromises, while the republicans won't budge a single inch on taxes. They seem to think that tax cuts pay for themselves at sub-40% taxation levels, and oppose even the most clever of ways to increase revenue, like cap and trade.

The only way to stop corruption is to eliminate greed from human nature. Go figure that out for us. Meanwhile, don't act as if there used to be a better time, a golden era when the government didn't handle everything so badly. There wasn't. It was always this incompetent, corrupt, and disconnected. Life just wasn't as complicated or as competitive. The public had less access to solid information, and there was less of a disparity between the rich and the poor, both in terms of skills and in terms of wealth. It didn't feel like we were getting so boned by the white house because, as a whole, we shared the benefits of the good times and the costs of the bad times more equally.

What's your degree? I doubt you know more about this than Doug, yet you belittle his education.

Oil was definitely a huge part of the crisis. Speculation is a big part of the problem, too. So much of that price per barrel goes to speculators. I agree 110% that recessions can be caused by the price of oil.

 

[PhantomPholly]

The Founders had it pretty well figured out. Allow Congress to tamper with our currency, and you create corruption.

Despite the fact that news media and other sources have led you to believe otherwise, the sum of taxation MUST ALWAYS BE what government spends - it cannot be otherwise. Nothing comes from nothing, there is no "magic money." If they spend more than they take in, it simply means we pay it through inflation (hidden taxation) or later with interest (borrowing, also an attempt to hide mismanagement). Nothing comes from nothing, no matter what politicians pretend with pretty fairy tails like "Keynesian Economics." Nor is taxation merely the money / value they steal from us - it is also our time which is stolen through "unfunded regulation."

The only way to stop corruption is to eliminate greed from human nature. Go figure that out for us.

You cannot completely eliminate evil, but by compelling transparency and creating a framework like our Constitution before Woodrow Wilson you can minimize it.

Meanwhile, don't act as if there used to be a better time, a golden era when the government didn't handle everything so badly. There wasn't. It was always this incompetent, corrupt, and disconnected.

Perhaps, but when our Government was compelled to use gold for currency and was prohibited from taxing income (equivalent to slavery in the eyes of the Founders), our government WAS much smaller. And, being smaller, the corruption was necessarily less damaging. A direct comparison is not possible because of the disparity in technology / standard of living - but Americans certainly had it better than typical folks in most parts of the world for most of our history. Once again, the simple principles of our Constitution for smaller government assured the greatest possibility for the most people at the time.

An interesting thought-exercise would be to imagine what the United States would be like today absent the debt, on a gold standard, and without the Income Tax Amendment. At one time it was easy to do the experiment - the United States stood in stark contrast to every other system. Now, with nothing to compare it to, Politicians can pretend anything they want - claiming "improvement" when in fact our standard of living is far suppressed from what it might be absent a burden of over 50% of our productivity.

What's your degree? I doubt you know more about this than Doug, yet you belittle his education.

Math and History. There is little historical correlation between degrees in finance and prediction of events - that is not belittlement, but simply a statement of fact. My original criticism of his post was based on the fact that his title claimed to reveal "The Real Reason for USA based Economic Recessions," but was incorrect because it left out factors having more impact than the ones stated. Was oil a contributing factor? Certainly, it will always be so long as our economy depends upon it. Was it the only, or even the largest factor? Not even close - and that is a real problem because the continuing tide of misinformation makes it less likely that you or I will enjoy a comfortable retirement.

 

[F16bmathis]

Everyone is right! Hardly anyone does anything for the good of the people. Its more along the lines of profitability. Oil and economy are tied together. The economy cant keep going the way it has. I think were running out of oil. Cheap oil is definetly going. Doesn't matter to me. I've gone electric, and other than needing a job to boost my Air Force retirement, I don't have a use for gas, well, also to bring the food to my table. Hopefully we'll move faster and faster towards electric and avoid the impending chaos of an oil starved nation.

Would've been nice for the Nissan Leaf to ACTUALLY use the reservation they gave me and let me be one of the first. Oh well, thats why I now have lithium batteries!

 

[PhantomPholly]

Yes, it seems all anyone gets today is unfulfilled promises - all illusion, no substance.

President Obama, in his State of the Union speech, said (among other things) that we should keep the monstrosity that is the Health Care bill (which was historically passed through a mechanism meant only to reconcile small budgetary discrepancies - a thoroughly despicable misuse of power) and "fix it." When you go to the doctor because you are sick, and they tell you you have a tumor growing on you, do you want them to "fix it?" No, you want it removed. The same analogy applies to nearly 50% of our Federal Government, and only massive surgery will save the patient. The price of oil, by comparison, is merely an inconvenience.

Oil is a big player, to be sure, but no commodity "causes" an economy to fail. What causes an economy to fail is when business is unprofitable. The primary cause of businesses being unprofitable today is excessive taxation. How can you be profitable when you have a 50% load placed on your cost of doing business? Attempts to export our excessive tax rates by building the cost of the tax into the price of the goods and services, which is what happens with "up front" taxes like payroll and personal and corporate income taxes, is futile. It simply makes our prices uncompetitive over seas. Throw it all away, and instead put your tax on sales (the price of selling to our market) and you suddenly get a 20-30% shift in relative prices between our products and the rest of the world, whether sold domestically or abroad. THAT will make America competitive again - at least until other governments follow suit. In the mean time, it will buy us a bit of time to dis

We face real challenges over the next few years. What remains to be seen is what will be done. Will the challenges actually be faced? Will they simply kick the can down the road to our children? Or will we, like many great empires before us, need to experience a complete economic collapse before our pain is great enough to cause us to remember Freedom?

 

[niftynev]

Hey guys what a wonderful debate you have just created congratulations. There is just one point in relation to economics and inflation that you have over looked. Money is a measure of human labour and time, hence as machines take over our work load as they have done over the past 200 years the buying power of our currencies should only go up but this has been stopped though government intervention by creating false and unnecessary economies. If it was not for this intervention all of the field workers (uneducated people) replaced by machines now would starve so by creating the endless red tape, vague and indiscernible law, tolerance of crime, prohibition, overboard workplace health and safety, insurance, security, tax and other administrative tasks, social security, unnecessary education & licensing, jobs have been created by government and laws that force the private sector to follow, hence inflation. These are the true pressures on inflation as the price of oil only has a very small effect on it. It is the price of the skilled labour that causes inflation as to have a real job in this day and age you need a degree and most people are just too lazy to learn hence the price of engineers, scientists, nurses, doctors etc will just go up because through high demand, while adding in all the other false economies there goes inflation through the roof like we have seen. Many degrees &education institutions in this day and age are false and unnecessary but are created to give the unemployable a job. Keeping people at work keeps us under control, but by destroying the unnecessary economies and jobs that go with it would deflate the price of everything and due to the lack of employment more people would spend the time to learn and be useful, further deflating prices. For this to happen, basic food and shelter would have to be free as it is already plentiful. A study was done in the 1920s by scientists and mathematicians that come to the conclusion that thanks to the mechanization of industry everything created could be done on a 3 day working week that was then so now it would be only a one day week if everyone pitched in.
Economics works well only when there is inherent scarcity now there is plenty so its theory is out dated and debunked thus indirectly causing all the unrest of this century. Zeitgeist Appendum on Utube is a great movie to watch if you are interested in the outcome and history of economics.
What a gripping read love it.

 

[PhantomPholly]

Those are some good observations - but I would take issue with the conclusions. In any event, a good book that delves just a bit into the anticipated "de-flation" is, "The Singularity is Near" by Ray Kurzweil.

One might argue that the "powers that be" have purposely accelerated this trend by rewarding sloth and punishing productivity, resulting in vastly more "unemployable" that keeps the rate of basic labor in the slave-wage realm. Whatever your leanings politically, it is unavoidable that one day even the smartest humans will not be able to compete with sentient AIs that think thousands of times faster than a human being and never sleep.