Over a Barrel

This piece was published a few days ago. It was a follow-up to another entry on the same subject in the same blog. Both were commentaries on a paper about oil shocks and their relation to recessions, written by the same author for the Brookings Institution.

The main thrust of the article is an interesting one, and one that goes much farther in explaining our current economic situation than many that simply try to point a flashy finger. It makes the case that the significant run up in gasoline prices last summer pierced the bubble and down everything tumbled. The reasoning goes like this:

Yes, there was risky lending going on, but by and large, people were able to make the payments on their too-much houses. Unfortunately, the buying and subsequent building spree caused people to farther out to find these homes, putting a greater share of their income in their gas tank with every few minutes extra commute. That was all fine and good for the consumer at $2 a gallon gas, but as it went quickly to $4 the additional strain on budgets was too heavy, and people could no longer meet their financial obligations. This caused the foreclosures that the banks hedged against by buying insurance, and so left AIG and others holding the bag.

$150 oil may not have been the only cause of the global recession, the article is quick to point out, but in my mind it goes a lot farther in explaining the global increase in food and commodities pre-bubble-pop, the cause and effect relations of prices, and the subsequent wildfire-like speed of the worldwide meltdown.