Most media outlets have treated the financial crisis as a consequence of Wall Street Gone Wild. However, this New Yorker article suggests – I think rightly – that the world’s financial meltdown was precipitated by the dizzying oil prices that had preceded last Fall’s collapse:
This isn’t an idle concern, since recent history demonstrates how damaging skyrocketing oil prices can be. Indeed, blame for the current recession can be laid in part on the spike in the price of oil between June of 2007 and July of 2008, when it peaked at nearly a hundred and fifty dollars a barrel. A study by James Hamilton, a macroeconomist at U.C.-San Diego, reached a startling conclusion: given the already weak state of the U.S. economy in 2007, the sharp increase in oil prices might have been enough, on its own, to tip the economy into recession, even without that year’s blowup in the credit markets. It wasn’t just that, as many people assume, higher gas prices functioned as a tax increase, taking money out of people’s pockets. More important was the fact that four-dollar-a-gallon gasoline dramatically changed the way people spent their money. In particular, it killed demand for S.U.V.s and big cars; S.U.V. sales were down more than twenty-five per cent by the middle of last year. And, since these were the vehicles that American automakers relied on for most of their business, job cuts soon followed (a hundred and twenty-five thousand auto manufacturing jobs were lost between 2007 and 2008), with ripple effects for the entire economy. The price spike had other consequences, too; some have suggested that it magnified the housing bust by making long commutes to the overpriced exurbs less attractive. And this all created a classic “oil shock,” like the one that hit the economy in the early nineteen-seventies.
With the economy – according to some – bottoming out (after an infusion of billions of notional dollars), oil prices are again on the rise, suggesting that we could very soon find ourselves worrying more about inflation than deflation – or, even more likely, stagflation. The economy – such as it is – is in the midst of a death spiral, in which “recovery” returns us to the reality of decreasing oil supplies, leading to ever-worsening economic downturns. With each cycle, we will be poorer and less able to cope with subsequent crises. Already we have seen investment in “alternative energy” dry up as prices collapsed with the severe economic downturn. With the country’s national wealth now effectively halved, grandiose plans for our alternative energy future have been scaled back – meaning that we are going to be less able than ever to make a smooth and painless transition to a post-oil future. We are deeply in the throes of what JH Kunstler calls “the psychology of previous investment,” in which our refusal to recognize the effective loss of sunk costs requires us to continue throwing good money after bad. The so-called “stimulus package” was a prime example of this psychology, which threw massive sums of borrowed or printed money into the black hole of highway and road work. Recognition that the crisis of the economy was caused by our confrontation with oil constraints would have suggested that this one last chance to spend some fictional money wisely would have been invested in making our future life together more viable – especially toward the end of arranging lives that will need to be more local and regionally self-sufficient. We are so deeply caught in the collective self-delusion of “globalization” mania that we have yet to recognize that the world is in the process of getting a lot bigger, not smaller.
Viewed retrospectively and prospectively, we are in the midst of a long-term boom and bust cycle, whose oscillations are likely to become ever more violent and disorienting. Based on the evidence of our collective response to this first Great Recession of recent history, I think we remain profoundly ill-prepared and deeply ignorant about our state of affairs. We are about to get a serious education.