I recently read The Big Short by Michael Lewis in which the depiction of the role of subprime mortgage lending in the US and then run away speculation on CDOs are shown to be the central and primary cause of the 2008 financial crisis. Then today I watched a lecture called The Third Industrial Revolution (https://www.youtube.com/watch?v=QX3M8Ka9vUA) by Jeremy Rifkin in which he portrays the 2008 subprime mortgage crash as being an "aftershock" of the real financial "earthquake" which was international oil prices hitting $147/barrel 6 months prior to the 2008 crisis. He continues this analogy by insisting global policy makers are, when they bail out the banks who invested in subprime mortgages or change investing laws, "trying to address the aftershock rather than the earthquake." I have never heard this view of the situation and am ignorant as to how international oil pricing functions and affects the world economy. How do people in the know square the relative significance of the US subprime mortgage investment bubble with this international oil price situation when trying to label the root causes of the 2008 global financial crisis?

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    $\begingroup$ There have been many accounts of the Global Financial Crisis. Most give at most a passing mention of the role of oil prices (rightly so in my opinion). It may have been an aggravating factor but not much more than that. $\endgroup$
    – user18
    Mar 8, 2019 at 3:23

1 Answer 1


It's worth differentiating between the financial crisis of 2007-2009, and the recession that began in December 2007.

The financial crisis was indeed caused by a run on wholesale funding that was precipitated by significant losses on real estate, both subprime and otherwise. As noted in the first link, stresses in wholesale funding first appeared in August 2007. At that time, oil prices (WTI) were still \$70-\$80/barrel.

Losses to financial institutions during the crisis that can reasonably be linked to oil are limited, and the timing is all wrong, so it's not credible to suggest that the increase in oil prices would have led to a financial crisis absent the actual mechanism (run on wholesale funding, significant losses on real estate assets) by which the financial crisis occurred.

That said, it's certainly likely that oil prices contributed to the recession that began in December 2007, as documented by James Hamilton, though the severity of this recession was in large part due to the fact that there was a financial crisis:

Recessions associated with financial crises have been more severe and longer lasting than recessions associated with other shocks. Recoveries from such recessions have been typically slower, associated with weak domestic demand and tight credit conditions.

Thus, oil prices are likely to have contributed to pushing the economy into recession, which may have worsened credit losses, fueling the stresses in the financial sector, but it's not credible to claim that they were a primary factor in causing the financial crisis, as compared to the structural vulnerabilities relating to wholesale funding and securitized assets.


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