Over at R-Squared, Robert Rapier recently wrote about another piece of the economic puzzle. As Robert is not an economist, he has the benefit of the doubt when writing about economics.

Robert’s thesis, which I share, is that recessions in future will be unlike those we have experienced in the past because the oil supply constraints sustain the oil price at higher levels through recessions and recoveries. This acts as a headwind against the economy, deepening recessions and hampering recovery.

Historically, when oil prices rose quickly and remained high the economy struggled. High oil prices lead to recessions and depressions, because they suck so much money out of the economy. A person whose energy bills go up by $100 or $200 per month has that much less to spend on other things. It is essentially like a tax applied to everyone that uses energy — with a large chunk of the money exiting the U.S. and contributing to our trade deficit.

Robert Rapier has dubbed this effect “The Long Recession“. The supply constraints which prevent the development of net new capacity, combined with small increases in per-capita demand from India and China multiplied by more than two billion oil consumers, merge to effectively eliminate the spare capacity cushion altogether. Therefore, in the absence of overcapacity, the slackening demand for oil caused by an OECD recession does not kickstart the automatic stabilizer (the fall in the oil price) that in past cycles acted as an external subsidy that helped the recovery along. Hence the “long recession”, as one recession succeeds another without much of a recovery inbetween:

In normal cycles, oil companies build up capacity when oil prices are high. A recession caused by high oil prices, combined with overcapacity built up during the price rise, can keep oil prices at bay for a long time. But what if oil capacity can’t be overbuilt, because oil production has peaked? In this situation, oil prices will start to recover just as soon as the economy starts to come out of recession. This may in turn “restall” the economy, leading to a long recession that just repeats the cycle every time the economy begins to recover.

The above lines were written well over a year ago. If we do indeed find ourselves in a second leg down, Robert Rapier will be able to claim that his “Long Recession” theory still stands after its first reality test.