The world has suffered a recession every time the oil price has reached current levels. And as the blog has warned for months, this time is unlikely to be different.
The reason is captured in the above chart. This uses:
• Oil production since 1970 as reported in BP’s annual review
• Average annual oil prices as reported by BP
• Annual global GDP as reported by the UN (to 1979) and IMF (from 1980)
• US recessions reported by the NBER (red columns)
The red line shows the total cost of oil purchases as a percentage of global GDP. It uses average Brent oil prices for 2011, and assumes 3% GDP growth. A number of key issues jump off the chart:
• Oil costs above 3% of GDP have always led to a recession
• The problem seems to be the sudden drop in discretionary income
• Initially this is masked, as consumers buy forward to avoid higher prices
• But buying then falls away, as soon as the oil price stops rising
Today’s economic outlook seems to be following the historical pattern. Oil costs at ~5% are the highest since the major downturn in the early 1980’s. And, of course, the ageing of the Western BabyBoomers makes it even more difficult for the economy to sustain this burden.