A spike in oil prices preceded 10 of the last 11 recessions since World War II. In March, energy prices passed a dangerous threshold that suggests we could be on the verge of number 12.
When energy spending rises above 6% of total expenditures, economist James Hamilton explains, consumers start to change their behavior significantly. In March, with unemployment near 9 percent and families still reeling from the credit crunch, we hit 6.27%.
Hamilton unpacks the details:
I've noted before that once energy expenditures get above 6% of average consumer spending, we start to see significant changes in spending patterns. We crossed that threshold in March, when 6.27% of every dollar spent went to energy-related goods and services. For lower-income groups, that expenditure share is significantly larger.
Don't confuse this graph, however, with the impression that China dictates oil prices. The U.S. still consumes about a quarter of the world's oil a little more than half as much as the world's second largest economy. But our oil demand has been pretty stable for the last few decades. It's the surge from abroad that's behind rising prices.
We want to hear what you think about this article. Submit a letter to the editor or write to email@example.com.