Oil prices are still a bit shy of their all-time nominal highs, but they are rising daily, and at this rate we could see $145/bbl oil again (the high-water mark in mid-2008) before the year is out. As the chart above shows, peaks in oil prices have a strong tendency to coincide with recessions. Is this causation or coincidence? I would argue that high oil prices are not the cause of recessions, but rather are symptomatic of the easy money and rising inflation that have lead the Fed to tighten monetary policy—and it is tight money that has caused almost all recessions. Regardless, should we worry about a double-dip recession because of rising oil prices today? For one, I seriously doubt we'll see a recession anytime soon, because monetary policy is not going to be tight enough to cause a recession for a long time. On the contrary, monetary policy is currently very accommodative, and this significantly mitigates the negative impact of rising energy prices.
Another good reason not to worry about rising oil prices is that the U.S. economy has become much less dependent on oil over the years, and real oil prices are only marginally higher today than they were in the early 1980s. As the chart above shows, our economy requires 58% less oil to produce a unit of output today than it did in 1970.
The major surge in oil prices in the 1970s led to a massive effort to reduce oil consumption and become more energy efficient. As a result, U.S. oil consumption today is about the same as it was in 1980, even though the economy has grown by 125% in the intervening years.
Meanwhile, today's relative high oil prices are already encouraging more drilling and exploration; Baker Hughes reports that world oil and gas drilling activity has soared 75% since mid-2009. And expensive oil will undoubtedly encourage more conservation and further the search for and development of alternative energy sources.
Oil is once again expensive, and gasoline is about $4 per gallon. That's unfortunate and painful for many, but it's not a catastrophe by any stretch.