Resident Fellow Desmond Lachman

It also overlooks the fact that further increases in oil prices would be occurring at a time when US consumer sentiment is already at a 30-year low and when the US economy is in the grip of its worst housing market and credit market bust in the past 70 years.

One should recall that, unlike other commodities, oil is an essential component of consumption. With the US, Europe, and Japan each importing about 15m barrels a day, further oil price increases must be seen as the equivalent of an increase in indirect taxes, which would be occurring at a most inopportune time for the global economy.

Past experience with oil price increases would suggest that the approximate doubling in international oil prices over the past year will subtract about a full percentage point from US gross domestic product growth in 2008 and a further full percentage point over the longer run.

This raises the question of whether further significant increases in oil prices can be sustained if their effect, together with the ongoing housing bust and the credit crunch, would be to push the US economy into a meaningful and protracted recession.

Desmond Lachman is a resident fellow at AEI.