the automobile industry reverberated throughout the supply chains of companies that supplied it and at dealers across America. Many hundreds of thousands of jobs were abruptly lost across the economy.
The direct impact was felt less in other developed countries because so much of the price at the pump is actually tax. Many European governments use gasoline stations as subbranches of their treasuries. Thus while government tax on gasoline averages 40 cents in the United States, it is more like $4.60 a gallon in Germany. Thus a doubling in the price of crude oil would only raise the retail price in Germany by a fraction of what it would in the United States.
Many developing countries subsidize retail fuel prices; oil-exporting countries, generously so. To allow prices to rise would mean social turmoil and perhaps strikes and riots. Thus these governments had to absorb the growing gap between the world price for oil and the prices that their citizens paid. Subsidies cost India’s government about $21 billion in 2009.26
SOVEREIGN WEALTH
When it was all added up, these high prices transferred a great deal of income from consuming countries to producing countries. The total oil revenues of the OPEC countries rose from $243 billion in 2004 to $693 billion in 2007. Halfway through 2008, it looked as though it could reach $1.3 trillion.
What were they going to do with all this money? Part of the answer was embodied in the initials SWF, shorthand for “sovereign wealth funds.” These were essentially government bank accounts and investment accounts set up to receive oil and gas revenues that would be kept separate from the national budget. For some countries, they were cast as stabilization funds to be held for “rainy days.” Some funds were explicitly created to prevent inflation and the Dutch disease that can result from a resource boom. These funds transformed oil and gas earnings into diversified portfolios of stocks, bonds, real estate, and direct investment.
But with oil prices rising to such heights, they had become truly giant pools of capital, swollen with tens of billions of dollars of unanticipated inflows, and now with tremendous financial capacity that would have far-reaching impact on the global economy. They faced their own particular quandary—how to invest all these additional revenues in a timely and prudent fashion. But the flip side was that their expansion meant a very large reduction of spending power in the oil-importing countries, which contributed to the downturn.
THE PEAK
Still the spell held. On July 11, 2008, oil reached its historic peak of $147.27—many times higher than the $22-to-$28 band that had been assumed to be the “natural price” for oil only four years earlier. The headlines told of more economic troubles ahead: Then something did happen. “Shortly after 10 a.m., as Mr. Bernanke was speaking to Congress,” the New York Times reported on July 16, “investors did a double-take as oil prices, previously trading at record highs, suddenly plunged.” But, said the oil bulls, it was “only a minor meltdown.”27
And then the fever broke. Demand for oil was going down in response to the higher prices. And now it was going down for another reason too. The world economy was clearly beginning to slow. The United States was already in a recession. In China’s Guandong Province, the new workshop of the world, orders were drying up, exports were declining, and workers were being laid off. Even electricity demand in that formerly booming province was declining. That was a message with global implications, for it meant that world trade was contracting. And the world’s financial system was beginning to shudder and shake, the spasms of a coming cataclysm. Financial investors began ditching “risky” assets such as equities and oil and other commodities.
In September 2008 came the decisive event. The venerable Lehman Brothers, the fourth-largest U.S. investment bank, 158 years old, failed. No one came riding to its rescue. The insurance behemoth AIG looked as though it might go down the very next day; the Federal Reserve stepped in to save it at the last moment.
“A COLD WIND FROM NOWHERE”
In the aftermath of the Lehman collapse, the world’s financial system simply froze up. Finance stopped flowing, whether to fund the daily operations of major companies or to provide the lubricant for trade. The Great Depression of the early 1930s, which had seemed to belong distantly in history, something that happened a very long time ago, now seemed to have happened only yesterday. History books and economic texts were hurriedly scoured for immediate and urgent lessons on