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The recession question
Oil At $100 A Barrel -- What Now?
January 09, 2008|By Steve Yetiv and Lowell Feld
Oil prices, which a year ago were as low as $50, hit $100 a barrel for the first time the other day. U.S. Federal Reserve Chairman Ben S. Bernanke and others have warned that high oil prices could seriously damage the U.S. economy. After all, oil price spikes have preceded most U.S. recessions since the 1970s. That includes the price spikes after the 1973 Arab oil embargo, the 1979 Iranian Revolution and the 1980 outbreak of the Iran-Iraq war.

Is an oil-induced recession on the way? Probably not. For starters, the 1970s oil price shocks were triggered by severe supply disruptions generated by "geopolitical events" - wars, embargoes, revolutions. In contrast, oil prices over the past year have spiked despite no significant supply disruption. Many people point to Iraq, but Iraq today is producing nearly as much oil as it did under Saddam Hussein.

Studies show that oil shocks driven by supply disruptions cause serious economic damage because they push consumers and firms to reduce consumption much more than shocks caused by other factors.

Consumers and others may have also learned from past experiences. Oil shocks are, well, less shocking than they once were. Partly as a result, buyers and sellers are not hoarding oil as they did during the oil crises of the 1970s. Nor do we see the type of public agitation that used to become visible when oil prices reached $70 or $80 per barrel.

Monetary policy also has changed. The Federal Reserve has been cutting interest rates, and that has helped stem the impact of high oil prices. Also, the International Energy Agency, which did not exist during the 1970s Arab oil embargo, now has rules, norms and the experience for managing oil crises. The agency requires its members to hold oil reserves equal to 90 days of their oil imports.

At the global level, world economic growth is stronger today than during previous oil price spikes, and that appears to be buttressing the American economy. We also need less oil today to produce the same amount of economic output. We have become more efficient in using this resource, so price spikes hurt less today than in the past.

It is still not certain that the U.S. can avoid a 1970s-style recession. We shouldn't become complacent. High oil prices do hurt, and that pain should remind us all of the crucial need for greater oil independence.

Steve Yetiv, author of "Crude Awakenings," is a political science professor at Old Dominion University in Virginia. His e-mail is syetiv@odu.edu. Lowell Feld, an economist, worked for the U.S. Department of Energy for 17 years.

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HOME LEARN ABOUT THE BUREAU CREATING THE CONSUMER BUREAU

Creating the Consumer Bureau
Beginning in 2007, the United States faced the most severe financial crisis since the Great Depression. Millions of Americans saw their home values drop, their savings shrink, their jobs eliminated, and their small businesses lose financing. Credit dried up, and countless consumer loans—many improperly made to begin with—went into default. Today, we’re still in the process of recovering.

For many decades, rising wages and growing savings meant that American families tended to carry only modest amounts of debt. But wage stagnation that began in the 1970s—combined with rising expenses for housing, health care, transportation, child care, and taxes—pushed more families into debt. At the same time, households saw a significant increase in access to credit, and many of the old rules regulating credit were gone. In the 2000s, there were widespread failures in consumer protection and rapid growth in irresponsible lending practices. Many lenders took advantage of gaps in the consumer protection system by selling mortgages and other products that were overly complicated.

This left many Americans with loans that they did not fully understand and could not afford. Although some borrowers knowingly took on too much debt, millions of Americans who behaved responsibly were also lured into unaffordable loans by misleading promises of low payments. Honest lenders that resisted the pressure to sell complicated products had to compete with their less responsible competitors.

Even those who avoided the temptations of excessively risky credit were caught in its web. Those who never took out an unaffordable mortgage nonetheless saw the values of their homes plummet when neighbors lost homes in foreclosure. Those who used credit cards and home equity lines of credit judiciously saw across-the-board increases in interest rates on credit cards and contraction of outstanding lines of credit. And those who had saved regularly saw their retirement funds lose significant value and their cities and states cut back on services to make up for their own revenue losses. The costs of irresponsible lending were borne by tens of millions of American families.

In June 2009, President Obama proposed to address failures of consumer protection by establishing a new financial agency to focus directly on consumers, rather than on bank safety and soundness or on monetary policy. This new agency would heighten government accountability by consolidating in one place responsibilities that had been scattered across government. The agency would also have responsibility for supervision and enforcement with respect to the laws over providers of consumer financial products and services that escaped regular Federal oversight. This agency would protect families from unfair, deceptive, and abusive financial practices. The President urged Congress to give the consumer agency the same accountability and independence that the other banking agencies have and sufficient funding so it could ensure that powerful financial companies would comply with consumer laws.

In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act created the Consumer Financial Protection Bureau (CFPB). The CFPB consolidates most Federal consumer financial protection authority in one place. The consumer bureau is focused on one goal: watching out for American consumers in the market for consumer financial products and services.

Read more about how the CFPB will serve American families.