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High Oil Prices Expected to Crash U.S. Economy

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As the mainstream media discusses the ever rising price of crude oil and the effects it will have on us at the pump, it makes you wonder if the last spike in oil prices was responsible for the U.S. economic meltdown in 2008? It is funny how the mainstream media glossed right over that idea and only a handful of economists were willing to entertain the thought. Could the current spike in oil prices cause another catastrophic meltdown of the U.S. economy? In April of 2009, economist James Hamilton presented a hypothesis at the Brookings Institute stating that the huge spike in oil prices is what caused the U.S. economy to collapse in 2008.

In Hamilton's report on www.econbrowser.com, he states that high crude oil and gasoline prices hit the U.S. auto industry like a tsunami, causing a shockwave that rippled through large swathes of the rest of the economy, causing consumers to cut back on spending. Energy prices also devastated consumers' discretionary income and eroded their confidence. The housing meltdown did play a huge part in the 2008 recession that crippled the U.S. economy, but it too can be blamed on higher oil prices: Cheaper homes build deep in the suburbs, lost their value and went underwater when gasoline hit $4 a gallon.

If there is any truth to the idea Hamilton puts forward in his report, the implications are frightening. First, it would mean vast changes in energy efficiency in the past 20 years did not have any insulating effect on U.S. economy against oil shock caused by $100 a barrel oil, as many economists thought. Hamilton concludes:

"Eventually, the declines in income and house prices set mortgage delinquency rates beyond a threshold at which the overall solvency of the financial system itself came to be questioned, and the modest recession of 2007:Q4-2008:Q3 turned into a ferocious downturn in 2008:Q4. Whether we would have avoided those events had the economy not gone into recession, or instead would have merely postponed them, is a matter of conjecture. Regardless of how we answer that question, the evidence to me is persuasive that, had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession."

According to www.oil-price.net, "Professor Hamilton's model echoes the work of Dr. Nouriel Roubini, a Professor of Economics and International Business at the Stern School of Business at NYU. Dr. Roubini evangelizes that it is high oil prices which caused the recent financial crisis. In fact, he is now predicting that although the global economy is presently in recovery, if the price of oil exceeds $100 a barrel, this will have a disastrous negative effect on the world economy."

"He states that it will have the same effect on the economy as oil did when it was at $145 a barrel in 2008. In an interview Dr. Roubini explained that he was of the opinion that an increase in the price of oil over $100 would have a negative real trade effect and disposable income effect on countries such as the US, Europe and Japan."

"Dr. Roubini also went further and said that he would not be against regulatory intervention to prevent swings in the value of oil. According to Dr. Roubini, the high price of oil at $145 per barrel was the primary reason for the financial crisis and not the crash of the world banking market. Of course time will tell whether Dr. Roubini's thesis is correct and whether an extreme increase in oil prices will halt global recovery." Experts like Roubini are predicting that if the price of oil exceeds $100 per barrel this year then it is very likely that the ongoing global economic recovery will be stopped in its tracks. Furthermore, it may be the catalyst for a bigger financial crash than the one we experienced in financial crisis of 2007-2010.

Investor Jim Rodgers said in an interview on http://www.bbc.co.uk/news/business-12235196that, "the price of oil is going to make new highs. It will go over $150 a barrel. It will probably go over $200 a barrel."The website www.theeconomiccollapseblog.com asks, "So now that oil prices are on a relentless march upward again, what can we expect this time?"

"Well, what we can expect is more economic trouble. The truth is that oil is the "blood" of our economy. Without oil nothing moves and virtually no economic activity would take place. Our entire economic system is based on the ability to cheaply and efficiently move people and products. An increase in the price of oil puts inflationary pressure on virtually everything else in our society. Without cheap oil, the entire game changes."

For more articles by Russell W. Dickson go to http://www.nolanchart.com/author1512.html

Columnist Russell Dickson, 'The Invisible Eye' at Nolanchart.com, is a prolific opinion, news, and fiction writer. Contact him by writing to NewsBlaze or at his blog.

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