The Oil Stimulus

Economist James Hamilton(UC-San Diego) blogs at Econobrowser.   He has provided some very thoughtful insight on the oil markets, and is one of the minority of economists who understood that speculators played some role in last year’s oil bubble. 

Hamilton has posted recently on the impact that the oil bubble had in worsening the recession (part 1 and part 2).  Hamilton regards the oil price rise to be the key factor in turning a slowdown into a recession and elucidates the way oil impacted key segments of the economy like autos and housing.

There are two implications of this analysis.  The first, given the importance of oil prices moves to the economy, it is all the more critical that we understand the role of speculators in spiking oil prices (this relates closely to my topic yesterday).  The second implication concerns the necessity of the large proposed stimulus plan.   Assuming symmetry (i.e., declining oil prices help as much as they hurt when rising), the sharp decline in crude should be extremely helpful to the economy.  As Hamilton’s discussion shows, there is a substantial lag factor, so the positive impact of lower energy costs will only just start to have an impact in the next several months.

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