Oil Price Boom’s Potential Role in the Economic Crisis

Earlier this month the Wall Street Journal’s Real Time Economics blog posted comments on a paper that discusses the oil price boom’s role in the economic downturn… with some interesting results:

In a paper presented at the Brookings Panel on Economic Activity Thursday, University of Calif.-San Diego economist James Hamilton crunched some numbers on how consumer spending responds to rising energy prices and came to a surprising result: Nearly all of last year’s economic downturn could be attributed to the oil price shock. As he writes on his blog, that’s a conclusion that he doesn’t quite believe in himself. We’d like to think that, say, the seizing up of the credit markets this fall had something to with the economy falling off the table in the fourth quarter. But then again, maybe what happened to oil prices had something to do with credit markets seizing up.

Clearly the high oil prices weren’t the only cause. But it is an interesting theory for why banks started to struggle in the first place. And if it was, there is even more government blame in that the Iraq War in some way was influencing the price of oil’s rise.