Why High Oil Prices Will Not Slow Economic Growth or Cause a Recession
No matter how high oil prices go when we go to the pump or use oil in any other way a business transaction is taking place. Economic activity is continuing. Money may be diverted from other transactions to pay for the higher oil prices but economic activity does not slow or stop.
Economic activity slows or stops when the amount of money in circulation changes, specifically, when the growth rate of money in circulation slows or stops dramatically. Higher oil prices do not affect the amount of money in circulation or the growth rate of money in circulation. So higher oil prices will not cause economic activity to slow or stop. Higher oil prices, in and of itself, will not cause slower economic growth or a recession.
In the 1970's the Federal Reserve, due to higher oil prices, inflated the amount of money in circulation. The Fed did this because the Fed leaders at that time believed that in order to pay the higher oil prices there had to be more money in circulation in the economy. All this mistaken logic did was to cause inflation. When the inflation came the Federal Reserve stopped inflating the money supply and a recession followed. It was the Federal Reserve's dramatic slowing of money growth which caused the recession.
Higher oil prices will affect how people spend their money. Higher gas prices will cause people to shift their consumption to compensate for the higher prices but will not cause people to stop spending their money. Higher gas prices causes people to cut back on some spending, say going out to dinner, in order to pay the higher gas prices. But people are still spending the same amount of money.
In order to pay the higher prices for gas you might cut back on going out to eat at the nice Italian restaurants like the Olive Garden and just go to the local pizzeria instead or even just eat at home. The money saved by eating cheaper will be used at the gas station to pay for the higher gas prices. The amount of money being spent does not change even though where the money is being spent will change.
Higher oil prices simply cause shifts in consumer spending but does not slow or stop that spending from occurring. Higher oil prices will not cause economic growth to slow or stop.
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18 Comments
Post a CommentGuessing author has spent most of his time since the article was written looking for a new job....what a joke !
Well the last 2 and a half years have certainly proven that the author of this article knows absolutely nothing about how the price of oil affects the world economy.
This is total nonsense. Much of profit from selling gasoline goes straight to the sheiks in Saudi. They send the money to Pakistan so the the madrasas can train the taliban kids to murder Americans.
"Money may be diverted from other transactions to pay for the higher oil prices.... "
Yes, and this diversion, means that people have to juggle the finances. Spending more on oil/gas, would mean less into sectors such as retail, which would be forced to cut jobs, and er slow growth!
I see your point but at some stage there has to be a tipping point. The last 7 of 8 oil price spikes have preceded a recession. Do the math.
interesting read
Great Article Michael
Fantastic article. You make a good argument for an alternate point of view on the subject.
Interesting analysis.
Very well written...loved it!
Yep, quite true. People will either save money, so they can spend it at the gas pump, or they will just find alternative ways to get around, and still spend the same amount of money. I know for a fact that if I were riding my bicycle to work every day, I'd just spend more money on beer!