Which crisis worst - the oil or the banks? Or is it both?
If there had been no oil shock would the credit crunch be so bad? Or if finance markets had not seized up, could we accommodate the rise in energy costs more readily. It is a game of What If? - but which of the crises is the worst? And does the combination of global crises compound their effect?
Business and the consumer are being squeezed from both sides. It is harder and more expensive to raise capital and the costs of power are rising, increasing the costs of manufacturing for companies and leaving less disposable income for the public to spend.
Even without an oil crisis increasing the cost of living, consumers would have had their spending curtained by the credit crisis because it is now harder to borrow to withdraw equity from property. And the end of the housing boom – the cause of the credit crunch in the US and the result of it in the UK – has removed the feelgood factor that encouraged people to spend, especially to spend money they did not have.
In theory - or in time - the economic slowdown caused by these two crises will reduce demand for oil and bring down the price, ending that problem. As the slowdown deepens, however, the need for new finance increases and the overhang of past debt will haunt both borrowers and lenders.
Had the oil shock occurred when banks were still lending freely companies would have taken it in their stride – as, indeed, they did as the price rose steadily from $20 a barrel. Had the credit crisis occurred when oil was still cheap there would still be serious consequences in the banking sector, however.
But is it a co-incidence that oil shot through $100 a barrel after the financial markets closed? Last time we had a credit crunch, in 1973, we also had the first oil shock. The same question applied then: could the world have coped with a financial crisis or an energy crisis – but not with both?
