The authors of this article write that 9 out of 10 recessions since WWII have fo

Question

The authors of this article write that 9 out of 10 recessions since WWII have followed a spike in oil prices. The US is increasing its domestic supply of oil. This year, the US will import 41% of its requirements vs 60% in 2005. The US Energy Information Agency maintains that with 20 years the US could become more self-sufficient and import only 14% of its requirements. Though oil is a global commodity, would US supply of 86% of its requirement dramatically reduce the probability of future recessions caused or greatly influence by oil price spikes?

Explanation / Answer

Answer:

A decline in the price of oil has a positive effect on oil importing countries like U.S. but a spike in oil price has negative effect on U.S. 9 out of 10 recessions were accompanied by increase in oil price. U.S is an importer of oil price and imported oil is used in home production. So aggregate supply in the economy decreased due to oil price rise. As a result the total product of the economy declined with some diseases like unemployment and depression. So recessions are followed by the oil price shocks. As economic growth is correlated with oil prices so it is easy for a growing economy to pay its debt than a non growing economy. So lower oil availability leads to decreasing credit availability and so as the home demand. This likely to reduce the price of expensive homes and raise the default rates

It is also obvious that a continuous fall in oil price is not also a good situation for US economy as it has negative effect on labor market.

Now-a-days U.S. Energy Information Agency maintains that with 20 years the US could become more self sufficient and import only 14% of its requirements. So the oil import will decrease in coming years due to self sufficiency but US is not an exporter of energy in the world market. So the effect of energy expansion in US economy will not affect much to the world market.

The future global recession will depend on many factors like value of US dollars in the world market as oil is purchased in US currency. So if, the value of US dollar increases that will affect the underdeveloped and developing countries expect being the lower price of oil.

As it is already mentioned that US is not an exporter of oil price so their self sufficiency will decrease the total export of oil exporting countries but will not affect the total energy supplies in the world market. This self sufficiency will reduce the oil price very less amount and will help many oil importing countries at a limited amount but the probability of recession will not affected very much.

The substitute of crude oil is very important instrument to decrease the power of oil exporting countries. For thisnew invention only those energy producing countries will be benefited. Recessions are not always accompanied by oil price shocks, these can be the results of any natural desasters or war.

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