Oil prices to blame for global slowdown

TORONTO: The 500 percent hike in oil prices since 2002, which resulted in massive money transfer to oil-producing nations, is much more to blame for the looming global recession than the US sub-prime mortgage crisis, says a banking report here.

The report "Just how big is Cleveland?" by Canadian Imperial Bank of Commerce (CIBC) Monday warned that falling property prices in US inner-cities like Cleveland could create a recession in Japan and Europe even much before the US.

"Four of the last five global recessions were caused by huge spikes in oil prices. And the world economy is coming off the mother of all spikes," the report quoted Jeff Rubin, chief economist at the bank's full-service investment wing CIBC World Markets.

"Over this cycle, real oil prices have risen over 500 per cent, twice the rise in real oil prices that produced the two biggest recessions in the post-war era - the 1974 recession and the double-dip recession in 1980 and 1982," said Rubin.

"If oil shocks half the size of the recent one caused the worst recessions in the last fifty years, they're a pretty obvious explanation for the recessions in oil-dependent Japan and Euroland earlier in the (next) year," he said.

"And even back in Cleveland, few could doubt the link between $4 per gallon gasoline last Memorial Day weekend and what's happening in Detroit today. And from where the US economy currently stands, vehicle sales have a much bigger downside than housing starts," said Rubin.

According to the report, oil shocks of the past triggered global recessions by transferring billions of dollars of income from OECD (Organisation for Economic Cooperation and Development) economies with very low savings rates to OPEC (Organisation of Petroleum Exporting Countries) economies with typically very high savings rates.

Thus, the transfer of income from US consumers to Saudi producers involves moving money from basically a zero-savings-rate economy to one in which the saving rate is around 50 percent.

"While many of those petro-dollars get recycled back into the financial assets of OECD countries, many of them never get spent," explained Rubin.

"Hence, the redistribution of global income from oil-consuming countries to oil-producing countries is far from demand-neutral insofar as the global economy is concerned.

"Those same transfers are occurring now, and at recent triple-digit oil prices, they are occurring on an even more colossal scale than ever before. The annual US oil import bill has risen by a staggering $200 billion since 2005. That's bigger than Congress' entire fiscal stimulus package," he said.  

Over the last five years, the report said, the fuel bill of all OECD countries has grown a staggering $700 billion annually, with $400 billion of this going to OPEC producers.

These massive cash transfers, it said, mean that more and more of the world's income gets saved and less and less gets spent. A slump in demand results in a weaker world economy.

Explaining how the Japanese and European economies were far more vulnerable to oil price spikes than the American economy, the report said the US consumes 19 million barrels per day, including five million produced domestically.

However, since Japan and Europe, except Russia and a few North Sea states, imported all their oil, their economies are twice as much risk of recession due to an oil shock as the US economy, the report warned.