Using terrorism to gauge oil’s impact

August 18, 2008

Do oil price spikes cause recessions? It is a controversial question and one that is very much a propos. It is all very chicken-and-egg, of course. If oil is soaring because of overheating economic demand, is it the demand or the ensuing rise in oil prices that causes the crash?

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Britain’s Centre for Economic Policy Research has had a go at trying to answer this with a report written by Natalie Chen and Andrew Oswald from the University of Warwick and Liam Graham from University College London. The twist was that the academics used terrorist incidents as an instrumental variable. Roughly, they looked at the impact of a sharp rise in oil prices on the profitability of various industries. By using terrorist events, they stripped out macroeconomic drivers and focused on something that was separate from the business cycle.

 

The researchers say their findings are not definitive but that they “lend” support to the claim that oil-price spikes can be a source of recessions. They urge caution, however, in the absence of study on the impact of microeconomic mechanisms linking oil to recessions. That may be the key to unravelling the oil-macroeconomy relationship, they conclude.

 

4 comments

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I read an article “Goldman Sachs: Oil Could Super Spike to $200” in May”. Many investors started to sale their stocks, which may be effected by this Super spike news. Today oil price is around $112. I am very sorry to say, this super spike theory is too much danger and it was a biased report. Please stop such oil super spike and misuse of the statistics in the future. Save investors.

Posted by A.Y. | Report as abusive

International politics can be undoubtedly the reason for recession.. International politics is a general word though, spike in oil is a bit specific, i got no problem to believe this story after I read that china was secretly supplying full ship loads of weapons to crack dealers in Africa in exchange of oil which they would steal to fill the ship to China.
China could be playing its part by pulling a major chunck of oil supply to induce recession. Now why would china do that ?? Wouldn’t it be like kicking its own bucket of water ?? Is there a chance that US played its bit to bring down the worlds largest bank the Citi group misteriuosly when Citi was helping China in a big economy project which helped China to bring clarity in its currency valuation in global market and hence even more investment in to china from EU and US ??
Who knows ?? May be, may be not !!
But its for sure..that more than terrorism affecting the oil prices, its the silet war between US and China, fueling the prices to burn..

Posted by Om | Report as abusive

It is very interesting to watch what’s happening with the dollar currency.

There is one thing that I cannot stop thinking:
While the USD went down the oil came up, and all the oil producers made a huge amount of USD because of that.

With the valorization of the USD can you imagine the impact on wealth of those oil producers?

I want to be an oil producer !!

Posted by Martins | Report as abusive

98.7% of the countries in Africa are not affect by the type terrism you have in other oil producing regions of the world

Africa is open for business and Forign Direct Investment. This is one of the issues to be dicussed at the International Conference on Industry Growth, Investment and Competitiveness in Africa(IGICA visit: http://www.kfint.com/igica). This is to be held on 8-10 June in Abuja, the capital city of Nigeria, a country with 140 Million people.

Contribution to this major event is open to those wishing to development tru partnership for commerce, investment and industry growth for Africa. registering an interest to the historical invesment event can be made through the IGICA website(www.kfint.com/igica)