U.S. Oil Recessions

December 4, 2008
Because we have not been able to produce all of the oil we use domestically, our economy, and therefore our prosperity as a nation, are directly tied to a steady supply of cheap imported oil.  Imported oil is the lubricant that keeps the gears of the U.S. economy turning smoothly.  If the supply is interrupted, or if the price increases, those gears start to grind together and slow down.  If the supply interruption or price increase is sufficiently large, those economic gears continue to grind and slow down until a recession results.  In fact, every recession we have experienced since 1971 has been associated with a rapid increase in the price of imported oil, most often the result of a supply disruption.

While a strong correlation between oil prices increases and recessions does not necessarily imply causation, research indicates that, if not always the direct cause, high oil prices were at least the "straw that broke the camel's back" of an already weak economy in each case.  It also appears that the speed and magnitude of the price increase can affect the severity and length of a recession; a tripling of oil prices in a short time period seems to create a much more severe recession than just a doubling.

Since the elimination of the gold standard by President Nixon in 1971, our country has had six recessions, all of which can accurately be called "imported oil recessions."  Each recession occurred within a few months to a year of a significant supply disruption and/or a rapid doubling in the price of imported crude oil.  The exact timing of the start of an oil recession seems to be related to, among other things, the general strength of the economy and household wealth at the time of the price increase, as well as how quickly the price of oil rises.

The 1973 Arab oil embargo led to our country's first oil recession and the first world oil recession.  Limited supplies caused by the embargo led to prices for imported crude oil more than tripling in less than a year, rising from about $3.60 a barrel in March of 1973 to over $12.50 by March of 1974, which pushed our already teetering economy over the edge and into a severe recession.  There were price controls on gasoline and domestic oil in effect at the time, which moderated the impact somewhat, but they also led to shortages and rationing.  Those old enough will remember the even and odd rules.  If your license plate ended in an even number, you could only buy gas on even numbered days of the month, the same with odd days of the month and license plates ending in odd numbers.

The next oil recession occurred in 1979, after crude oil prices again rose rapidly.  The oil price spike was due to a decrease in supply caused by the Iranian revolution, which led to the fall of the Shah of Iran and the taking of 52 American hostages for 444 days.  Prices for imported oil rose from below $15 a barrel in January of 1979 to over $30 in January of 1980, again pushing an already unsteady economy over the edge and into a recession.  The price controls on gasoline had already been lifted, but domestic oil price controls remained in effect, which helped to result in shortages and long lines at the gas pumps.  While the recession itself was declared over by August of 1980, the economy was still very weak and suffering from the sky-high interest rates, unemployment, and inflation that had introduced the terms "stagflation" and "misery index" into our vocabulary.

Our third oil recession began in 1981, less than a year after the end of the previous recession.  It occurred after the Iran-Iraq war caused more supply disruptions and continued high oil prices proved to be more than our still fragile economy could bear.  It would be more than three years before oil prices dipped back below the $30 a barrel price first seen in January of 1980 and that was only after worldwide demand was significantly reduced in the midst of the second global oil recession.  In addition to high oil prices, there were serious structural and regulatory problems with the economy at the time that made the 16-month recession even longer and more severe than it might have otherwise been.  President Reagan very effectively dealt with the structural economic problems and finally broke the back of stagflation, which put us on a course that directly led to the more than 20 years of prosperity we have since enjoyed.

The fourth oil recession began in 1990, again after imported oil supply disruptions and rapid price increases, this time caused by Iraq's invasion and subsequent occupation of Kuwait.  Prices increased from under $15 a barrel in June of 1990 to over $30 a barrel in September of 1990.  The recession was short and relatively mild, lasting only eight months.  The speedy recovery was helped by oil prices returning to about $17 a barrel by February of 1991 and the fact that there were no longer major structural problems in the economy to hinder a return to growth.

We enjoyed nearly a decade of uninterrupted prosperity, largely due to stable or falling oil prices, before the fifth oil recession started in early 2001.  Oil prices spiked from under $10 a barrel in January of 1999 to over $20 a barrel in August of 1999 and then to over $30 a barrel in September of 2000 due to supply and demand imbalances after significant OPEC production cuts.  The supply cutbacks were intended stop cheating on production quotas, the major reason for stable or falling oil prices during the 1990's, and return the cost of oil to what OPEC members considered more appropriate levels.  This one was also a relatively short and mild recession, lasting only eight months, and the quick recovery was helped by the 2001 tax cuts and oil prices falling back to about $16 a barrel by January of 2002.

We are currently in the midst of our sixth oil recession.  This one began in December of 2007, after we had endured a steady and painful increase in oil prices over the course of four and a half years from $16 a barrel in January of 2002 to $70 a barrel in July of 2006.  The price increase was large enough to noticeably slow down the economy and likely would have been sufficient to cause a recession no later than 2006 were it not for the 2003 tax cuts and the still expanding housing bubble, which lessened the immediate impact on family budgets. However, after a brief respite, there was a large spike between January of 2007 and July of 2008 when prices rose from about $50 a barrel to nearly $150, basically guaranteeing that what might have been another relatively mild downturn in the U.S., had oil prices dropped to more reasonable levels instead of continuing to increase, would turn into another global oil recession whose effects will probably last for years.