The staggering rise in oil prices since 2002 may be playing a far greater role in pushing the global economy into a recession than the U.S. sub-prime mortgage meltdown, a new report from CIBC World Markets finds.

The report challenges how falling property values in U.S. inner-cities like Cleveland, Ohio could create a recession in Japan and the European countries, before even causing a recession in the U.S. economy.

“Four of the last five global recessions were caused by huge spikes in oil prices. And the world economy is coming off the mother of all spikes,” says Jeff Rubin, chief economist at CIBC World Markets, in a statement.

He notes that in this cycle, real oil prices have risen more than 500%, twice the rise in real oil prices that produced the two biggest recessions in the post-war era: the 1974 recession and the double-dip recession in 1980 and 1982.

“If oil shocks half the size of the recent one caused the worst recessions in the last fifty years, they’re a pretty obvious explanation for the recessions in oil-dependent Japan and Euroland earlier in the year,” Rubin said.

The report notes that in the past, oil shocks have triggered global recessions by transferring billions –or now trillions — of dollars of income from OECD economies with typically very low savings rates to OPEC economies that typically have very high savings rates.

“While many of those petro-dollars get recycled back into the financial assets of OECD countries, many of them never get spent,” Rubin said, adding that the redistribution of global income is therefore not demand-neutral in the global economy.

Now those same transfers are occurring at a greater scale than ever before, according to Rubin. The annual U.S. oil import bill has risen by a staggering $200 billion since 2005 — a value larger than Congress’ fiscal stimulus package.

This scenario has been true for the incomes of all OECD countries, the report finds. Over the last five years the fuel bill has grown by $700 billion annually, with $400 billion of this going to OPEC producers. These massive cash transfers mean that more of the world’s income gets saved, and less spent, which shows up in a weaker world economy.

The report notes that both the Japanese and European economies are far more vulnerable to oil price spikes than the American economy, since they import nearly all of the oil they consume.

But the American economy is also vulnerable. “The one-two punch from record fuel bills and end of the tax rebates saw consumer spending plunge at a 3.1% rate in the third quarter, the largest decline in over a quarter century,” Rubin said. He added that the last drop in household spending occurred in a previous energy shock, caused by the 1990 Iraq war.

Plunging motor vehicle sales accounted for the largest single component of the drop in third quarter spending, according to the report.

“The risk is that the damage there is far from done,” Rubin said. “The past year’s high pump prices have not only decimated sales but sparked a discernable, potentially lasting reduction in miles driven.”

In addition, with 80% of GDP showing a strong negative relationship to high energy costs, the negative effect could be felt by a wide range of industries, including travel and agriculture.

The report also cites research showing that that it takes about a year for an oil price shock to have its maximum impact on U.S. GDP.

Energy economist James Hamilton reported these lags fit the experience of past shocks, including the OPEC-induced recessions of the 1970s. Among other factors, the unwinding of an involuntary buildup of autos and other durables is a key determinant of the lag structure involved. The report also finds that a similar lag structure holds for the impact of large declines in oil prices.

The virtual collapse in oil prices to US$12 a barrel in 1986 was a key driver behind a rebound in U.S. economic growth to a 4%-plus pace, even in the face of mounting financial costs from the savings and loan crisis, the report says.

“Given that oil prices really took off in the third quarter of last year, after several years of more gradual increases, we should expect to see its maximum hit on the economy right about now,” said Rubin. “By the same token, however, the impact from the even larger decline in oil prices over the last two quarters should give its maximum boost to the economy over the next six months.

@page_break@“If triple-digit oil prices are what started the recession, then US$60 oil prices are what will end it,” Rubin said.

IE