A fantastic chart from Jim Bianco on Twitter:
This chart does not show the price of oil. It shows the percentage deviation from the trend in the price of oil.
Any time oil has spiked more than 50% above the price trend, it has preceded a recession. 2008, 2001, 1991, 1980, 1974, 1970–all years of oil spikes, all years of recession.
Now, there have been recessions without preceding oil price spikes, but there has never been an oil spike without a succeeding recession. At least since 1970, which is as far back as this chart shows.
Oil spikes cause recessions, and it’s because oil is the lifeblood of the global economy. The price of oil affects the price of almost everything, given that almost everything is transported and delivered by truck, ship or plane, which all run on oil.
When the price of oil increases, everything gets more expensive, which means less disposable income for everyone. Businesses, in order to meet increased costs, will inevitably have to cut back on labor costs, which translates into layoffs and unemployment, which contributes to recession. It’s a very simple concept and I don’t think I need to say much more about it because I’m sure you all understand this intuitively.
The point here, though, is that oil spikes don’t simply precede recessions, they cause recessions. Not fully, of course, but partially.
It is highly probable that the economy enters recession within the next 12 months, if it’s not already in one right now.