Every Oil Shock Is Followed by a Recession. But Not for the Reason You Think

A landmark study by Ben Bernanke — the man who went on to run the Federal Reserve — found that it wasn't oil shocks that caused recessions. It was the interest rate hikes that followed. The central bank's reaction did more damage than the oil shock itself. We call it the "double brake." The oil shock hits the economy first. Then the central bank raises rates on top. Two brakes on an economy already slowing down. Right now, with the Strait of Hormuz closed, oil above $108, and gas fields burning in the Gulf, the Bank of England faces exactly this dilemma. The UK economy is growing at zero. Unemployment is at a 10-year high. Vacancies have collapsed below pre-pandemic levels. Wage growth is slowing. The conditions for a wage-price spiral do not exist. And yet the Bank of England's cutting cycle has stalled — and some are calling for rate rises — because of an energy shock the Bank has no power to fix. In this episode, Jon Adair and Neil Woodford explain the Bernanke research, apply it to the UK economy, and discuss what it means for anyone with a mortgage, savings, a pension, or investments in the UK. Referenced in this episode: "Systematic Monetary Policy and the Effects of Oil Price Shocks" — Ben S. Bernanke, Mark Gertler, Mark Watson. Brookings Papers on Economic Activity, 1:1997. https://www.brookings.edu/wp-content/uploads/1997/01/1997a_bpea_bernanke_gertler_watson_sims_friedman.pdf