CALGARY - A prominent Canadian economist says oil prices deserve credit for the global economic slowdown, not the crash of the U.S. housing market.
In a report Monday, CIBC World Markets economist Jeff Rubin questioned whether plummeting home values in U.S. cities like Cleveland - deemed by many to be the epicentre of the housing crisis - could possibly be behind the widespread global turmoil.
"Is Cleveland, and all the other depressed property markets in the U.S., really big enough to deep-six a $60-trillion world economy?" Rubin asked, noting that Japanese and European economies were plunged into a recession well before the United States was.
He said perhaps the implosion of U.S. property values is "just a big head fake" and that something entirely different is at play.
He notes that four of the past five global recessions were preceded by an oil shock, and this time it should be no different.
"Yet the recent spike in oil prices doesn't seem to get any credit for what's happening to the world economy now," Rubin wrote. "That's odd, because it should."
The more than 500 per cent increase in the price of oil gets "virtually ignored as a culprit behind today's' economy, eclipsed by the ongoing crisis in financial markets," he said.
He added that global demand has taken a hit as income from consumers in developed, oil-needy countries flows into the coffers of oil producing nations such as Saudi Arabia, which tends to save much more of its money.
"In effect, the income transfer from American motorists to Saudi Aramco means that more and more of the world's income gets saved and less spent. That demand leakage shows up in a weaker world economy," he said.
And the high fuel prices, which have since come off substantially, have also been slicing into consumer purchasing power.
The price of crude spiked at a record US$147 in July, but has since been cut by more than half to below US$64 a barrel.
The steep decline offers some reason for optimism, said Rubin.
"Diagnosing the disease is always a good first step to finding a cure," Rubin said.
"If the global recession is primarily about the recent oil price shock, then the subsequent halving of prices ... and not a pickup in Cleveland property values, is the real road to recovery."
Doug Porter, deputy chief economist for BMO Capital Markets, said the downturn we are currently seeing is not part of a "garden-variety cycle" and that housing is clearly at the centre of it.
"There's no question that the spike in oil prices to over $140 definitely aggravated what was already an extremely fragile economic situation, and arguably pushed the U.S. economy over the edge," he said in an interview.
The falling commodity prices will have direct implications - both positive and negative - for the Canadian economy, Porter added.
When oil spiked above US$125 per barrel earlier this year, the oil and gas sector in western Canada flourished, but other parts of the country suffered.
The high oil prices took a massive toll on the automotive sector, as fewer and fewer consumers were able to afford fuel for their cars. Meanwhile, many trucking, manufacturing and other fuel-consuming businesses saw their overhead costs skyrocket.
With oil prices sharply lower now, the situation is reversed.
Oilsands producers in Alberta are scaling back their plans and cutting spending. But the hard-hit manufacturing sector in central Canada has more breathing room and consumers are paying less to fill up their gas tanks.
"Unfortunately, you can get too much of a good thing and now that we've had this deep drop in energy prices, I think the negatives will probably start to outweigh the positives," said Porter.
"The best thing for Canada is relatively high energy prices, but stable energy prices."