World oil prices and U.S. recessions: tracking a slippery relationship

Pages233-238

Page 233

Most Ph.D. theses fall without making a sound in the academic forest. Not Jim Hamilton's. His 1982 thesis created a stir with its contention that increases in world oil prices had played a role in nearly every modern recession in the United States, including those of the 1950s. Hamilton, now a well-known econometrician at the University of California, San Diego, has devoted part of his research efforts over the past 20 years to tracking the ever-changing relationship between oil prices and the economy. He spoke to Prakash Loungani about his findings.

LOUNGANI: What was the reaction when you presented your thesis?

HAMILTON: My thesis advisors at Berkeley were a little bit skeptical but supportive.Many economists found it hard to believe that there was such a dramatic relation that no one had noticed before. [Stanford economist] Robert Hall, who discussed my paper at a major conference at the time, remarked:"My first reaction to Hamilton's paper was that he had made up the data!"

Page 237

World oil price changes = U S. recessions

LOUNGANI: How has your thesis held up over the past 20 years?

HAMILTON: Quite well.My evidence showed that six of the seven U.S. recessions since 1947 were preceded by a sharp increase in the price of petroleum; the only one that wasn't was the 1960 recession.While I was working on the thesis, U.S. oil prices shot up because of the Iran-Iraq war in the early 1980s and the U.S. deregulation of the oil industry. This was followed by a recession. A decade later, the spike in oil prices triggered by Iraq's invasion of Kuwait was followed by the recession of 1990-91. A decade after that, oil prices played a role in the recession of 2001. So the score is now up to 9 out of 10.

LOUNGANI: Can you tell us more about the role of oil in the 2001 recession?

HAMILTON: Oil prices did go up quite substantially during 1999.However, all of that was just undoing the big collapse of oil prices in 1997. So only starting in 2000 were there significant new highs in oil prices. The historical relation would have predicted that a slowdown would start in the latter part of 2000, and that's exactly what happened. The U.S. economy slowed and then entered into a recession in March 2001.

LOUNGANI: Is oil responsible for the tepid recovery from the 2001 recession?

HAMILTON: It has probably been a factor. Oil prices spiked in the winter of 2002 and early 2003 as a result of concerns...

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