Thursday, October 18, 2007

Keeping an eye on oil

I'm going to point out again what I think will ultimately bring about a recession and it's not the housing melt down. I've posted in the past here and here about what I think the cause of recessions is. It is a spike in energy prices. As long as energy climbs in a controlled manner economies can adapt and survive higher energy prices. It's when they spike quickly that problems start to happen. If all of a sudden it costs two or three times as much to fill your car, heat your home or ship your products then bad things normally follow. Unless you have a really nice boss or can easily pass on the increase in energy costs to your customers then you are going to have to make some drastic changes in your life style during an energy spike. We all know how likely it is for your employer to boost your pay by 20% especially if he's feeling the pinch from the energy spike himself. Needless to say the extra money that was used for discretionary spending probably suffers during an energy shock. Since personal consumption is 70% of the economy it's not a good thing when a big chunk of this gets diverted to energy. Less consumption means less profits for business. Shrinking profits mean layoffs. Layoffs mean even less consumption. A vicious circle ensues. Notice the chart above. You will see a large spike in 79-80. Two recessions followed. Another spike during the first gulf war causing an immediate recession. Another spike in 99-2000. The bursting of the tech bubble and another recession followed. We are nearing the level at which things can get dicey. If we cross the $100 level this winter and especially if oil holds at this level I would say there's a very good chance we could see a recession sometime next year.