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Rick Santorum thinks gas prices caused the recession. Is he right?

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On Monday, Rick Santorum offered his theory of the financial crisis: “We went into a recession in 2008 because of gasoline prices. The bubble burst in housing because people couldn’t pay their mortgages because of $4-a-gallon gasoline.” Is this crazy? Or is Santorum onto something?

Al Goldis/Reuters

Former Pennsylvania senator Rick Santorum.

It’s hard to find an economist who would go quite as far as Santorum. For one thing, the recession officially started in 2007, so the timing doesn’t work. For another, the collapse of the housing market, and the financial collapse that followed, had a variety of causes, which you can read all about in the Financial Crisis Inquiry Commission report. None of the members pinned the blame on high gas prices in the summer of 2008. But the idea that gas prices contributed to the problem isn’t totally far-fetched. After all, James Hamilton, an economist at the University of San Diego, has been arguing for awhile now that the sharp spike in oil prices in 2008 worsened the downturn.

Oil shocks have a long, storied history of coming along right before the economy crashes. In a 2010 paper, Hamilton pointed out that 10 of 11 post-World War II recessions in the United States were preceded by a sharp increase in the price of oil. By itself, that’s not proof that oil shocks always cause recessions, but sudden volatility can certainly make the economy more vulnerable to collapse. One 2010 study from the St. Louis Fed, for instance, found that “an average-sized shock to... oil prices increases the probability of recession in the U.S. by nearly 50 percentage points.”

Did something like this happen in 2008, when the housing market was already hurting and oil prices surged to $140 per barrel (thanks to tight supplies and rising demand in the developing world)? That’s quite possible. “Something in addition to housing began to drag the economy down [in 2008],” Hamilton notes, “and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.” He points out that oil shocks can have a disproportionate impact by hurting demand for new cars and light trucks. That, in turn, causes unemployment to shoot up in auto-producing areas. What’s more, when oil prices spike, people and firms frequently delay purchases of new capital and durable goods.

So Santorum is wrong on the sequencing here — the housing crisis came first, then the oil shock made things worse. And there’s little evidence for Santorum’s claim that Obama actively wants higher gas prices. But it’s not crazy to fret about the effects of high gas prices on the broader economy. Fortunately, there are a few differences between our current situation and 2008. Oil prices may be high these days, but this isn’t a sudden upward jolt — prices were high for much of 2011. And researchers at the Stanford Energy Modeling Forum have found that the economy can adjust to steady, gradual increases in the price of crude better than wild lurches.

For more smart discussion on whether the current oil price spike could cramp the ongoing recovery, see Michael Levi, Karl Smith, and Tim Duy.

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