Is The Economy At The Mercy Of Oil?

Think back to the summer of 2008. A barrel of oil was $147 and the national average price of gasoline was over $4.

A few months later the economy drove over a cliff in what is know known as the “Great Recession.” Coincidence?

Two scientists – one from the University of Washington (UW) and One from Oxford University, in the UK, argue it was anything but. They point out that of the 11 recessions in the U.S. since World War II, ten were preceded by a spike in oil prices.

As the economy seems to struggle toward recovery, James W. Murray, UW professor of oceanography, and David King, director of Oxford's Smith School of Enterprise and the Environment, say it will have to contend with increasingly expensive oil. The two say there are strong economic reasons to find an alternative to oil.

Economic, not environmental reasons

"Given our fossil-fuel dependent economies, this is more urgent and has a shorter time frame than global climate change," Murray said.

The "tipping point" for oil supply appears to have occurred around 2005, says Murray, who compared world crude oil production with world prices going back to 1998. Before 2005, supply of regular crude oil was elastic and increased in response to price increases. Since then, production appears to have hit a wall at 75 million barrels per day in spite of price increases of 15 percent each year.

"As a result, prices swing wildly in response to small changes in demand," the co-authors wrote. "Others have remarked on this step change in the economies of oil around the year 2005, but the point needs to be lodged more firmly in the minds of policy makers."

Recovery, interrupted

Last year many economists believed the economy in the U.S. was well on its way to recovery in the early part of the year. As a result, the price of oil rose sharply, as traders anticipated more demand from growing economies. By early May, the U.S. national average gasoline price rose to just under $4 a gallon.

Then, a funny thing happened. Economic growth stalled. Experts declared the economy had hit “a soft patch.”

While Murray and King are no fans of natural gas as an alternative to oil, President Obama appears to be embracing the fuel, of which the U.S. has an abundant supply. In his State of the Union message last week, Obama declared the U.S. should emphasize natural gas as a fuel where possible. In a follow up speech in Las Vegas, Nev., he elaborated on natural gas' benefits.

Obama's on board

“Some of you may not have been following this, but because of new technologies, because we can now access natural gas that we couldn’t access before in an economic way, we’ve got a supply of natural gas under our feet that can last America nearly a hundred years,” Obama said. “And developing it could power our cars and our homes and our factories in a cleaner and cheaper way. The experts believe it could support more than 600,000 jobs by the end of the decade. We, it turns out, are the Saudi Arabia of natural gas.”

At the moment, natural gas in extremely cheap. Supplies are increasing faster than Americans can consume them and U.S. ports are not conducive to exports. Even though there are still many technology hurdles to using natural gas on a large scale as a motor fuel, it could be used to power new electricity generating plants.