Recession: We are hitting an economic growth ceiling caused by limited cheap oil

People wonder what has been happening recently, with wildly gyrating financial markets and government debt problems. It seems to me that we are bumping up against an economic growth ceiling, brought on by a limited supply of cheap oil. As a result, we appear to be headed back into recession. Debt deleveraging can be expected to play an important role as well, and may cause this recession to be much worse than the last one.

Connection with Cheap Oil

Economists tend to believe that economic growth can continue, essentially forever. We are now reaching a reality check, with the recent severe recession and the economy’s apparent inability to rebound from that recession.

There are many reasons to believe that at least part of our continuing recessionary problem has to do with oil prices. For one thing, we know that food prices tend to rise with oil prices (Figure 1), and that food is a major expenditure for much of the world’s population. The association between oil prices and food prices arises partly because oil is used to grow and transport food. Now that food is being used to produce biofuels, there is a connection in the opposite direction as well: high demand for oil tends to lead to high demand for food crops that substitute for oil, thus further acting to raise food prices.

Figure 1. Food prices measured by FAO Food Index seem to rise and fall with oil prices, measured by Brent Oil Price (Data, FAO, EIA)

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