But an important factor in understanding what happened is missing: energy prices. In November to December 1998, a barrel of oil cost just $12. But by July 2008, the price had risen to $140. Across the same timeframe, the price of a gallon of regular petrol in the US quadrupled – from $1 to $4.
Several factors triggered this increase in fuel costs: a lack of exploration due to low oil prices over almost 20 years, rising demand due to higher growth in the world economy, unrest in the Middle East, Nigeria and Venezuela, hurricanes Katrina and Rita, and speculation.
But together with rising interest rates on subprime mortgages, increasing energy prices from 1999 to 2008 pulled the rug out from under the feet of a few million households that had been seduced into buying a house with subprime mortgages and adjustable rates. Eventually, together with the rise in energy prices, these became costs they were unable to pay. Subprime mortgages were primarily sold in working class areas, where homebuyers were told that the increasing value of their new home could give them the cash they would need to refinance when interest rates went up. They were wrong and had been fooled.
This, however, is only part of the story. More than 100m US households were not exposed to subprime loans, but were very exposed to higher energy prices. American households are extremely dependent on their cars – to go to work, bring their kids to school, and to shop. Given this context, they were more or less forced to use the same amount of energy (petrol), in spite of a quadrupling of prices.
My organisation has been tracking US consumer behaviour since February 2001, and our monthly Consumer Demand Indices showed month-by-month how households were cutting down on their consumption of clothing, food and durables like cars, furniture, white goods, TVs, and radios. It was a gradual development over the years, reflecting the increase in petrol prices. But in early 2008, it started to get dramatic.
When consumers do not take goods out of Wal-Mart and other retailers at the same rate as before, retailers do not order new supplies. These in turn are not produced or transported from China or other places. As a result, orders for new cars, containers and ships were cancelled. The demand for steel, and the iron ore for steel production, dropped. Unemployment increased, depressing consumer demand even more – and on a worldwide scale.
Paraphrasing the slogan Bill Clinton successfully used during the US presidential election in 1992: “It’s the energy price, stupid!”. And it still is. Petrol prices have come down to around $3.60 per gallon, depending on where in the US you are. But crude oil is still around $100 per barrel. Things have improved, but it’s not over yet.
Jørn Thulstrup is chief executive of the Institute for Business Cycle Analysis.