Did High Oil Prices cause the Financial Crash?

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Everyone has been concerned by the recent global economic crisis. In the United States and Europe the newspapers are full of stories of those who have lost their houses and businesses. Elected officials from many nations have sung the evils of traders' bonuses and demanded an international effort to legislate in this arena. Job losses, home foreclosures are regularly making the headlines and most anyone is or closely knows someone else whose life was impacted by the financial collapse.

However, is the global economy really so dependant on trader's bonuses, the housing market and financial services as numerous governments and journalists would like us to believe?

Is it really the collapse of the housing sector, and that of the banking sector which are the origin of the worst recession that we have experienced for sixty years? We at Oil-Price.net believe otherwise, and so do two brilliant economists: Professors James Hamilton and Nouriel Roubini.

This year, Professor James Hamilton of the University of California presented an economic model to the Brookings Institute in which he asserted by using this model, that it was high oil prices and the oil shock which were the catalyst for the recent financial crisis. In order to back up his theory Hamilton begun his economic model in 2003. At this time crude oil was about $30 a barrel. Using the 2003 price as a ball point figure he showed what an oil shock would do,(such as the one experienced in 2007-8) to GDP. The graph that he presented showed that high oil prices would directly bring GDP to what it was in 2008. In view of his findings, he put forward the theory that it was in fact high oil prices which caused the housing sector to crash and in turn the financial market. He turned current theories on their head. According to Professor Hamilton it was in fact high oil prices which caused the financial crisis we have experienced in the past two years.

In fact Professor Hamilton model echoes the work of Dr Nouriel Roubini who is a Professor of Economics and International Business at the Stern School of Business at NYU. Dr Nouriel 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 last year. In a recent 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 Nouriel 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 Nouriel 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.

Our own study of the market and global economy shows that the price of oil is going to have a direct effect on real trade, disposable income and hence the state of the economy.

Oil prices have nearly doubled this year and are reaching $80 per barrel. Interest rates at close to zero and a weak dollar are encouraging price rises in all markets including the oil market. The financial health of world economies is in fact more dependant on oil prices, than the financial services market and the housing market. If we look closely we see that the economic state of major world economies is often a reflection of fluctuations in oil prices. This is why if the price of oil exceeds $100 per barrel this year then it is very likely that the global economic recovery will be stopped in its tracks. Further more, it may be the catalyst for a bigger financial crash than the one we have recently experienced, and world economies are currently trying to recover from.

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