Soaring oil prices also transfer billions of dollars of income from oil-consuming economies to oil-producing economies. Nearly one trillion dollars migrated from OECD economies to OPEC ones in the record run-up of oil prices preceding the last recession. Since savings rates in countries like Saudi Arabia, UAE and Kuwait are typically ten times what they are in major oil-consuming economies like the United States or Western Europe, the shift in purchasing power resulted in weaker global demand.

But by far the greatest impact that oil price shocks have on the global economy is the one they make on inflation and, hence, interest rates. This linkage is the means by which they have typically delivered a mortal blow to economic growth. Oil shocks have always given rise to growth-ending increases in interest rates as central banks are forced to respond to the inflationary fallout they leave behind.

The last recession was no exception. As oil prices soared from $35 per barrel in early 2004 to almost $150 per barrel in the summer of 2008, consumer price inflation in the US tripled to a rate of almost six per cent. It didn’t take long before interest rates caught up to inflation and, in the process, blew up the massively over-leveraged subprime mortgage market and the economy with it.

But lest we’d forgotten, it was the massive rise in energy inflation, and an associated rise in food prices (more on that in future posts), that catapulted the Federal Reserve Board’s federal funds rate from a nurturing one per cent setting in early 2004 to a level over five times that only a couple of years later. The rate of energy inflation rose from less than one per cent to as high as 35 per cent.

Oil prices caused the last recession, and oil prices will cause the next one as well. Energy inflation is already on the march. In fact, this time around oil prices are rising much earlier and much more rapidly than they did last cycle. Inflation is already running at nearly a five per cent rate in China; as oil prices go on to set new record highs, it’s only a matter of time of before we see those inflation rates in North America and in the rest of the OECD.

And when we do, get ready for another oil-induced global recession.

No one has to tell me about how severe the banking crisis was. Why the hell do you think I’m an author now? But blowing up bonuses at investment banks and blowing up the world economy are two very different notions.

Everyone will tell you that it was virtually free credit conditions that spawned the subprime mortgage phenomenon. And everyone acknowledges that it was the sharp mid-decade run-up in interest rates that burst the bubble and caused the collapse in US housing prices and in the value of those mortgage-backed securities that are still wreaking havoc on bank balance sheets all around the world.

But the question folks aren’t answering is, what forced that fatal five-fold increase in the federal funds rate in the first place?

The answer to that, my friends, doesn’t lie with foreclosed homes in Cleveland, or with over-leveraged banks in New York, but rather with something that was happening in Cushing, Oklahoma.

From January 2004 to January 2006, a doubling in the price of West Texas Intermediate (the benchmark oil price in North America, which is priced at Cushing), from $35 per barrel to $70 per barrel, drove energy inflation through the roof.

Inflation, as measured in the energy component of the US Consumer Price Index, soared from an annual rate of less than one per cent to as high as 35 per cent. That, in turn, drove the headline consumer price inflation rate from less than two per cent to almost six per cent, the highest reading since Saddam Hussein lit Kuwaiti oil fields ablaze in 1991.

The Federal Reserve Board had no choice but to follow suit. Pretty soon, not only was inflation at almost 6 per cent, but the federal funds rate was as well.

Suddenly borrowing wasn’t free any more, and then, when homeowners couldn’t make the mortgage payments on homes they couldn’t afford in the first place, the whole financial system imploded.

But if oil had stayed around $35 per barrel (incidentally what the “energy experts” were calling for at the time), energy inflation would never have spiked, and neither headline inflation nor the federal funds rate would have gotten anywhere remotely close to the levels that sparked the financial crisis.

The subprime mortgage crisis was not the cause of the recession. It was a symptom of a much bigger problem—an energy shock.

It was oil prices that brought about the last recession, and unless we make some major changes to the way we live, it’ll be oil prices that bring about the next recession as well.

Ben Bernanke doesn’t get it. Make sure you do.