Have high oil prices caused the current recession(s)?

November 7, 2008 9:18 AM

CIBC's Jeff Rubin and Peter Buchanan have written an article (pdf, pages 4-6) arguing that triple digit oil prices (and not plunging real estate prices) are to blame for the current economic woes of the OECD. [via]
posted by adamdschneider (41 comments total)

I was wondering about this myself. While they may have not been responsible for the existing flaws in the financial system, the tremendous spike in oil prices sure seems to have put the squeeze on homeowners and probably knocked over the first domino. Then this happened.
posted by mullingitover at 9:26 AM on November 7, 2008

There are two problems.

1) Global recession

2) Global credit crisis.

They had a common trigger -- overextended consumers. But they're very different problems, and have very different root causes. Cheap oil didn't force the banking industry to throw out credit standards in home loans.
posted by eriko at 9:29 AM on November 7, 2008

Greed, speculation, an insatiable appetite for more bull shit, oil, subprime, Lehman Bros, it's all part of the same pile.

And as a side note- IF and bank were to go down in this country, it'd be CIBC.
posted by gman at 9:31 AM on November 7, 2008

whoops... failed that one like Lehman:

IF any bank were too
posted by gman at 9:37 AM on November 7, 2008

to too two
posted by gman at 9:38 AM on November 7, 2008

Surely oil prices have to factor, I mean why are we surprized when people buy a huge inefficient house 4 hours from their workplace and a Tahoe to make that trek suddenly find it hard to pay the morgage when they also have to pay for gas and heat?
posted by Pollomacho at 9:40 AM on November 7, 2008 [1 favorite]

I don't have a car. Never did. Never will. I ride the bus. Whenever I read about the high price of oil, I figure out that some asshole has done pissed off another asshole so he jacks up the price and spreads propaganda about the world running out of oil. Everybody panics. Long lines at the gas pumps. Lots of finger pointing....and then suddenly someone finds an extra barrel of oil in their basement and overnight gas and oil prices are low again.
posted by doctorschlock at 9:41 AM on November 7, 2008 [1 favorite]

Greed, speculation, an insatiable appetite for more bull shit, oil, subprime, Lehman Bros, it's all part of the same pile.

Yes, greed is responsible for the rise in oil prices. Everyone knows that Oil is gods reward for selfless behavior, and if we're not too greedy he fills up the earth with more oil.
posted by delmoi at 9:43 AM on November 7, 2008 [3 favorites]

While they may have not been responsible for the existing flaws in the financial system, the tremendous spike in oil prices sure seems to have put the squeeze on homeowners and probably knocked over the first domino

That's missing the point, though. If it wasn't a temporary rise in oil prices, it would have been something else. Once the dominos were set up, a fall somewhere down the road was inevitable. Housing loans hadn't been and shouldn't be given to people who will default if their gas budget needs to double, or they lose their job and have to spend a few months looking for one, or any any other reasonably common misfortune.

Over the years, American homeowners have been through much more strain than they were put in by the historically high oil prices. And yet none of those strains caused the massive foreclosure rates we're seeing now, because in the past lenders were smart enough to not give out tons of loans that would go bad in those kinds of situations.
posted by burnmp3s at 9:44 AM on November 7, 2008

Couldn't it be, you know, both? High gas prices = harder to heat your McMansion. Harder to drive 2 hours to your house in the suburbs. Costs more to transport the materials to build the new houses, leading to higher construction costs. And all those factors combined means all those new subdivisions become undesirable to live in, and new homeowners choose to purchase smaller, closer to town, used homes. New home prices plummet, bringing down other home prices, until the entire market is depressed. Rinse and repeat.

Welcome to the long emergency, muthafuckas!!
posted by billysumday at 9:46 AM on November 7, 2008 [2 favorites]

Also, keep in mind that the price of oil crashed along with the rest of the economy. It hasn't helped. If anything, you could argue that Oil prices was the straw that broke the camels back, but actually I would argue the opposite. Oil prices coming down actually precipitated the collapse of hedge funds and investment banks that had leveraged investments in Oil hoping to make back money they'd lost in the subprime market.

I maybe high gas prices put the squeeze on consumers, making it harder to pay their mortgages, but I think most of the problem was due to the ARM's exploding.
posted by delmoi at 9:47 AM on November 7, 2008

A big boy did it and ran away.

Two investment bankers trying to claim that the current shitpile had nothing to do with them. Same as all of those other fuckers trying to blame the low income loanees for the collapse, when the traders lost more on speculative gambles than probably has ever been lent total to low income customers.

You played casino with the banks' money. You lost. Take your medicine like a man and stop whining.
posted by Jakey at 10:07 AM on November 7, 2008 [2 favorites]

Pretty hilarious, considering CIBC is the only Canadian bank neck-deep and fucked by subprime debt.
posted by Jairus at 10:28 AM on November 7, 2008 [1 favorite]

so now that gas is down to 2.40, everything's gonna be just fine? Break out the party hats!
posted by jenkinsEar at 10:42 AM on November 7, 2008

Does it really matter WHAT knocked over the the house of cards? Shouldn't we be more concerned that we're building institutions with playing cards?
posted by blue_beetle at 10:59 AM on November 7, 2008 [4 favorites]

Also, a wizard did it!
posted by blue_beetle at 11:00 AM on November 7, 2008

Oh yea, wizards fer sure.

Put me in the group that says, "shaky fundamentals were merely exposed, not wrought by, high oil prices."
posted by Mister_A at 11:03 AM on November 7, 2008 [1 favorite]

Seems like the problem wasn't the oil prices, but rather that all parties neglected to predict them and consider the impact they would have.

Whatever happened to due diligence?
posted by Sys Rq at 11:06 AM on November 7, 2008

Yeah, I wouldn't listen to anything coming out of a CIBC think tank. I think they are the only Canadian bank that regularly fucks up.
posted by chunking express at 11:28 AM on November 7, 2008 [1 favorite]

canadianIMPERIALbankofcommerce
posted by blue_beetle at 11:39 AM on November 7, 2008

I maybe high gas prices put the squeeze on consumers, making it harder to pay their mortgages, but I think most of the problem was due to the ARM's exploding.

It was probably both. The ARMS exploded, and unfortunately, at roughly the same time, gas prices doubled.

The lions share of the mortgage defaults have been in states like my home state of Florida and California (and in both of these states, gas is a necessity because our brilliant urban planners intentionally imposed systems of zoning laws that compartmentalized residential areas from retail, agricultural and industrial areas, with large, undeveloped areas in between, in order to leverage the perceived benefits of building reliance on cheap, mass-produced automobiles into the system).

At the time, I though the spike in oil prices was the product of pretty blatant market manipulation. Nothing had changed whatsoever to drive the prices up except some analysts speculated there might not be enough oil around to meet future demand from China and India, and every few days Cheney was sending out disinformation meant to fuel speculation about an imminent war with Iran, potentially blocking oil shipment routes through the Strait of Hormuth.

The likely effects of such a dramatic increase in oil prices on homeowners in Florida and California would have been well understood. I haven't had much tolerance for the Naomi Klein school disaster-capitalism line of criticism in the past, but look at the facts. In all that time when thousands of Florida lenders with previous criminal histories for fraud were having such a field day issuing specious loans and raking in huge commissions hand-over-fist, setting the stage for the collapse, who was at the wheel of the bus in Florida? Jeb Bush.

Maybe the financial crisis is a sort of modern-day equivalent of late WWII's infamous "Nero Order." Or maybe it's just incredibly poor planning. It seems strange that so many smart people (paulson, greenspan, etc.) who never made such clumsy mistakes while amassing their own personal fortunes somehow became bumbling idiots, seemingly incapable of matching wits with even many rank amateurs here on the blue once they became responsible for the stewardship of the entire nation's financial well-being.
posted by saulgoodman at 11:56 AM on November 7, 2008 [1 favorite]

oops. "lions"-->"lion's" "though"-->"thought"
posted by saulgoodman at 11:59 AM on November 7, 2008

If it wasn't a temporary rise in oil prices, it would have been something else.

Give that man a cigar!

Nearly everyone naturally thinks that high taxes and/or significant mandatory retirement, health, savings are negative and undesirable intrusion on personal freedom and market efficiency, but this position can only be held in ignorance or rejection of the theory of The All Consuming Rent.

To explain this, quite simply, look at your budget and tell me what the dominant outgo is: chances are it's land -- either via rent to a landlord or the mortgage payment you're making.

How did land prices get so high? Clearly, we collectively bid them up to these levels, over the centuries in most places.

And we bid land prices up largely with after-tax takehome pay, less mandatory higher priority expenses like food, transportation to work.

By putting more expenses "mandatory" (taken out of income before of the rent payment) -- like universal health care, retirement savings, a first-class education system -- we essentially get these services for free, since they are no longer in competition with the All Consuming Rent.

The converse is true, too. In the flat-tax minarchist utopia, land prices will be bid up to the point of making everyone (who does not own land) a peasant.

Economics used to understand this, but the neoclassical school came around and intentionally blurred the line between land and capital.

So in the present case, many if not most areas of the settled and civilized world experienced a land price speculative boom that prompted millions of people to stretch their household budgets, feeding The All Consuming Rent. Then when their household income goes down or other expenses goes up -- something has to give.
posted by troy at 12:13 PM on November 7, 2008 [3 favorites]

Nothing had changed whatsoever to drive the prices up except some analysts speculated there might not be enough oil around to meet future demand from China and India,

Actually the runup corresponds closely to news-rumors of Ghawar topping out, plus Mexico's Cantarell.
posted by troy at 12:15 PM on November 7, 2008

troy--ah, thanks for that info. still, the specter of peak oil alone can't account for such a dramatic increase in such a short period of time, and according to most analysis I've seen, the eventual supply declines of post-peak oil production are a long-term issue--the way down will come more quickly than the way up, no doubt, but not nearly so quickly as to account for such a sudden and short-lived spike in prices. and the near constant saber-rattling with iran was definitely a factor over a period of months, contributing to higher oil prices.
posted by saulgoodman at 1:01 PM on November 7, 2008

Oil prices coming down actually precipitated the collapse of hedge funds and investment banks that had leveraged investments in Oil hoping to make back money they'd lost in the subprime market.

Except that the market collapsed before oil prices came down.
posted by Blazecock Pileon at 1:18 PM on November 7, 2008 [1 favorite]

I'm no market expert, but I think the run up was a perfect storm of supply worries coming into view on the horizon, the realization of burgeoning middle-class China-India (ie half the economic planet) demand, speculative money moving out of equities and into commodities, plus of course the weakening dollar.
posted by troy at 1:27 PM on November 7, 2008

I cannot favorite troy's first comment hard enough. Thanks a bunch for that link. Great reading.

Are there any politicians/economists today who would support something like a single/land-value tax? I suppose the environmental movement has similar ideas, i.e. carbon taxes and fees on pollution.

Fascinating. Thanks.
posted by mrgrimm at 1:28 PM on November 7, 2008

Except that the market collapsed before oil prices came down.

Uh, no Oil prices peaked in June, and started a slow decline. Look at This chart showing USO (an ETF based on the price of Oil) and the share price of AIG, Fanne Mae, Wachovia Bank and Wamu.

As you can see, Oil has been on an almost straight line decline since June, and the banks all crash in September. Everyone expected Fannie Mae and Leahman brothers to fail, it was AIG that was the real huge shock. Wachovia and Wamu were two more unexpected failures, those didn't happen until the end of September, when Oil had already dropped 35% from June highs.

It is certainly true that oil prices have continued to decline since the collapse.
posted by delmoi at 2:27 PM on November 7, 2008

CIBC made some bad bets and took it on the chin from Enron and again from subprime mortgages. Rubin was predicting $200 oil by 2012 as recently as April 2008. Maybe CIBC can add another feather in its cap.
posted by Frank Grimes at 3:52 PM on November 7, 2008

Uh, no Oil prices peaked in June, and started a slow decline. Look at This chart showing USO (an ETF based on the price of Oil) and the share price of AIG, Fanne Mae, Wachovia Bank and Wamu.

The graph you're linking to shows oil prices rising and peaking in July, and a roughly 40-50% drop in those shares you list, before oil prices begin to track downwards.
posted by Blazecock Pileon at 4:13 PM on November 7, 2008 [1 favorite]

still, the specter of peak oil alone can't account for such a dramatic increase in such a short period of time, and according to most analysis I've seen, the eventual supply declines of post-peak oil production are a long-term issue

I can't help but note that if you weren't aware that Cantarell was in decline, you are even less qualified to try to explain oil prices than I am, and that's saying a lot. Ah well, we can't do much worse than professional analysts who still write as if the credit crisis is only about "subprime" mortgages.

My best guess is that oil traders generally didn't give a damn whether peak oil was here or not; they did observe that world oil production wasn't really going anywhere for a few years there, and demand was rising at a ridiculously fast rate. How much of the price increase was people speculating that this situation would continue for at least a little while longer, and how much was the regular old supply and demand they teach in school, it is impossible to say. At any rate, both of those factors that had been contributing to the rise have now contributed in reverse to the decline. As had been forecast by some, oil production has lately been hitting record highs again for the first time since 2005, while demand has fallen dramatically in many places including the nation that is the world's greatest consumer of oil, and people are tending to speculate that these things will continue for a while.

Now my personal favourite forecast remains for now, as it has for something like five years, that the peak of global oil production will turn out to be somewhere in 2008. But I've watched the oil markets long enough to suspect that even if that proves correct (as in a lucky guess) it would not necessarily tell you much about the price of oil in 2009. One thing that's long been predicted as a consequence of peak oil is increased price volatility. As the supply curve gets so very steep, it means that changes in demand affect the price more than they used to. Accounting for the nonhomogeneous nature of demand growth around the world, changes in supply might reasonably be predicted to do the same (ie. higher prices will stop demand growth in some places long before others, in particular those that are experiencing rapid economic growth and oil demand growth will tend to not be as quickly affected by rising prices, so at least until you get to the point where big players like the USA are affected, demand becomes relatively inelastic too.) Constrained supply doesn't necessarily mean peak oil, of course, but we did have a rather more limited supply of the stuff than we were used to, and so that contributes to price volatility.

Anyway, I don't know. I didn't expect the price of oil to go below $80. That it has doesn't give me any comfort, it's one of the things making me fear that this present situation might turn out to be something a fair bit worse than an ordinary recession.
posted by sfenders at 6:19 PM on November 7, 2008

Rubin was predicting $200 oil by 2012 as recently as April 2008.

The last time I checked, 2012 hadn't happened yet.
posted by adamdschneider at 6:42 PM on November 7, 2008

As a Canuck, let me say the Canadian Imperial Bank of Commerce is the last Canadian bank from which you should ever take advice. If there's a Canadian bank that is going to fail, it will be CIBC. You can take that bet to the bank...
posted by five fresh fish at 7:01 PM on November 7, 2008 [1 favorite]

Come to think of it, take that bet to a credit union...
posted by five fresh fish at 7:01 PM on November 7, 2008

The premise was one I could agree with, but I could never get behind the overall tenor of the report (OIL! OIL! OIL!). Sure, the price of oil might have been the lit match in the corn silo, but one of the results of the explosion is unemployment, the rate of which was at 6.5% in the U.S. in October. (Some alternative measures put it significantly higher.) I think right now we're caught in a vicious cycle, where layoffs trigger foreclosures, and vice versa. If I read the CIBC report right, their claim is that things should get better later on in 2009 (since the price of oil hit its peak in July 2008 and it usually takes about a year for the effects to make their way through the economy). I think we'll be lucky if things improve significantly after only a year.

But I agree with this report that the price of oil will continue to bedevil us. The next time the GDP seems to have its shit together, and starts to go up, I'm sure that we're going to take another beating, because the price of oil will go up even faster and expose any remaining credit problems owned by the banks or other entities like hedge funds. I think we're only seeing the beginning of troubles.

On the positive side, assuming we make it through this, we're going to have an economy that will be strong when faced with high energy costs, and the remaining significant financial entities will have small debts and sharper skills to identify companies that are worth lending to and investing in (ie the opposite of GM and Ford). Unfortunately, this will probably take a while.
posted by A dead Quaker at 8:25 PM on November 7, 2008

MEANWHILE, the International Energy Agency--the energy watchdog for industrialized nations--is just days away (Nov. 12) from releasing its annual World Energy Outlook. The report's executive summary [PDF], made public on Thursday, paints a gloomy picture for a sustainable energy economy:

- The IEA forecasts oil prices reaching $200 by 2030, almost doubling last year’s forecast of $108 by the same year. Current oil prices - below $70 a barrel and less than half their peak summer level - are a temporary effect of the economic crisis. "While market imbalances could temporarily cause prices to fall back, it is becoming increasingly apparent that the era of cheap oil is over."

- This year's report compiles findings from the agency's extensive analysis of the world’s 800 biggest oil fields. Findings show that although global oil production in total is not expected to peak before 2030, "production of conventional oil — crude oil, natural gas liquids (NGLs) and enhanced oil recovery (EOR) — is projected to level off towards the end of the projection period. Conventional crude oil production alone increases only modestly over 2007-2030 — by 5 mb/d — as almost all the additional capacity from new oilfields is offset by declines in output at existing fields. The bulk of the net increase in total oil production comes from NGLs (driven by the relatively rapid expansion in gas supply) and from non-conventional resources and technologies, including Canadian oil sands."

- OPEC oil reserves are big and cheap enough to increase production and cap oil prices, but it warns: “Investment by these countries is assumed to be constrained by several factors, including conservative depletion policies and geopolitics. “There remains a real risk that underinvestment [between now and 2015] will cause an oil supply crunch.”

- Non-OPEC conventional oil production is already at plateau and is projected to start to decline by around the middle of the next decade, accelerating through to the end of the projection period. Production has already peaked in most non-OPEC countries and will peak in most others before 2030.

- Over the next 22 years, consuming countries will devote 5 per cent to 7 per cent of their gross domestic products to pay for their oil, up from 4 per cent in 2007. This will have "serious adverse implications for the economies of consuming countries".

- The world economy will witness a $2,000bn shift in wealth and power from oil-consuming countries to members of OPEC as oil prices rise.

- The much higher oil price assumptions, on top of concerns about climate change and the daunting challenge of investing enough in new production, prompt the IEA to warn that the "current global trends in energy supply and consumption are patently unsustainable - environmentally, economically, socially."

If not now, soon enough our economy will take a wild, slippery ride on the oil slide express....
posted by prinado at 1:12 AM on November 8, 2008 [1 favorite]

On the other hand, at least two fungi have been discovered that emit petroleum as a byproduct.

When you see what's going on in Dubai, when you see photos of solid gold toilets and Rolls Royces in whatever backwater mid-East monarchy, and realize that some of those nations are providing free damn-near-everything to their citizens...

...well, ya just gotta start thinking that maybe it's been a bit foolish to give most of our money to those guys. Surely to god, if one-hundredth of that wealth exodus has instead been applied to research on alternatives, a solution would have been found long before we went bankrupt.

If that had been done, everyone in our country would have free post-secondary education, free transportation, free whatever-the-hell. We'd have saved our selves megabajillions in exported wealth.
posted by five fresh fish at 8:36 AM on November 8, 2008

The graph you're linking to shows oil prices rising and peaking in July, and a roughly 40-50% drop in those shares you list, before oil prices begin to track downwards.

So? The financial institutions had been dropping in share price all year (since last december), it was in September that they actually failed as institutions, getting take over by the fed, going bankrupt or getting bought out. On the chart you can see the moment as the point where their share price dropped to near -100% . (or -90% in the case of wachovia)
posted by delmoi at 9:04 AM on November 8, 2008

Is it weird that when I saw the post, I wondered what oil prices could possibly have to do with the decline of the Oxford Canadian English Dictionary?
posted by chrominance at 8:02 AM on November 9, 2008

MEANWHILE, the International Energy Agency is just days away (Nov. 12) from releasing its annual World Energy Outlook.

The Oil Drum is in rare form today, as they discuss the various hidden assumptions and variables in the IEA report.
posted by sfenders at 5:24 AM on November 17, 2008