Gas Price/Recession Cycle

  On July 5, 2011, I published a post entitled "Does Keynesian Policy Still work?"  In this post, I made the point that there is now an alternating cycle between gasoline price increase and economic recovery. When the economy crashed in 2007, we went into a deep recession. With fewer people working and less spending, there was less demand for petroleum.  With less demand, the price of oil dropped.  The government pumped seven hundred billion bucks into the economy, and we had the beginnings of a recovery.  But with more people working, there was more demand for petroleum.  This bid the price of oil up, and the higher oil price choked off the recovery.
    We are now in the 3rd cycle of this process since 2007.  Remember, how a few months ago, the price of fuel was quite low----in this area, less than $3.00 per gallon.  And remember how all the financial pages said the economy was finally having a recovery?   Guess what?  The price of gas in  this area in now $3.65 per gallon---just high enough to begin choking off the recovery again, very soon. The problem is that we now have a situation where the amount of oil required to power the whole world at full employment is slightly higher than the maximum which the whole world can produce.  U.S. production has increased due to shale oil production, but this increase is more than matched by declines in other parts of the world.  The only real solution is another radical improvement in fuel economy, but even this is a short term solution.  In the long term, the world runs out of gas.  The only long term solution is to convert to electric powered cars, with the electricity produced by wind, solar, and other renewables.  For a more in-depth explanation of how resource limitations constrain our economic choices, check out the original post: Keynesian Limits