The Economy and the Price of Oil

This post could be viewed as Part 1 of a series on the reasons for the Great Recession.

The price of oil rose continuously during the last Bush administration until the Fall of 2008. This tax on Americans and others around the world was increasingly difficult to bear. This is one of the forces that set off the recession. Why did the price of oil rise during this period? Was it the OPEC cartel? I want us all to shed crocodile tears for poor OPEC that just doesn’t have the capability to pull something like this off. Cartels are, in the long run, subject to the challenging behavior of their least well behaved members. These members will exceed their quotas whenever and wherever they can. So if it was not caused by a conspiracy of oil producing countries, what was the cause? The cause was on the demand side. The cause was the growth of developing economies like India and China.

Why did the price of oil fall as the Great Recession began? Well, it certainly was not a conspiracy on the part of OPEC to decrease oil prices. The worldwide recession meant a decrease in demand for oil; that caused the decline in its price. What have we seen since? Recovery in some sectors and in some countries caused the price of oil to rise again. But recently, as we are toying with a double dip recession, the price of oil declined again. So we see that oil prices and the world economy are locked in a complex dance. Oil prices rise in recoveries, but ultimately cause the recovery to end.

I do not expect the price of oil to drop dramatically now. We must adjust to higher prices. But how do we adjust to higher oil prices? Ordinary people need to live closer to their jobs. This means that we need a functioning real estate market to properly adjust to higher oil prices. Unfortunately, we do not have a functioning real estate market at the present time.