As oil prices edge ever higher, more people are expressing concern about what this phenomenon is doing or could do to economic recovery. The conventional wisdom used to be that, in the U.S., whenever total national spending on oil products exceeded four percent of GDP the country went into recession. Elaborate charts have been produced showing how this happened in four of the recessions over the last 40 years. In 1974, 1981, 1991, and 2008 oil prices rose to levels anywhere from 4.5 to 9 percent of GDP just prior to the U.S. economy going into recession.
Only the recession caused by the dot.com bubble of 2001 did not involve unusually high oil prices. Three of the price spikes --1974, 1981, and 1991-- came as the result of disruptions to the oil supply from the Middle East, while the 2008 spike is now thought to have been caused by the demand for oil getting ahead of available supply. Each of these price spikes and subsequent recessions was followed by a drop in U.S. demand for oil. During the 1974, 1991, and 2001 recessions, oil demand dropped by about a million barrels a day (b/d). The 2008 recession cut U.S. demand by roughly two million b/d and the recessions of the early 80's cut demand by four million b/d.
So where do we stand in in the early spring of 2011? First, demand in the U.S. has bounced back about half way towards the 2007 high of over 21 million b/d from the winter of 2008-2009 low of about 18.5 million b/d. For the world as a whole however, consumption has recovered all the way back to a new high of 89 million b/d in February. This rebound has been so rapid that there again are concerns about demand outrunning supply.
