Skip to comments.Why High Oil Prices Even At $200 Won't Cause A Recession
Posted on 04/12/2012 6:03:25 PM PDT by blam
Why High Oil Prices Even At $200 Won't Cause A Recession
Commodities / Crude Oil
Apr 12, 2012 - 07:43 AM
By: Money Morning
Martin Hutchinson writes: Last Friday's weak unemployment numbers, with only 120,000 jobs created, brought renewed wails that high oil prices were causing a recession.
Having heard this refrain so many times, I thought I'd dig a little deeper.
After all, a peak of $145 per barrel in the West Texas Intermediate oil price pretty well coincided with the onset of the 2008 recession.
The question is whether or not high oil prices are always correlated with an inevitable downturn.
For instance, when you look closer, oil was not to blame in 2008. Other factors were much more serious culprits, including the housing crisis (by then in market collapse) and the banking crisis that followed.
Between them they are the hallmarks of financial crisis that brought on the nasty recession.
To find out why, we need to do a little arithmetic.
High Oil Prices and the Economy The U.S. Bureau of Labor Statistics breaks down personal consumption expenditures (PCEs) on energy versus other items on a month-by-month basis.
The PCE on energy goods (which include natural gas and electricity) rose from 5.05% of total PCE in 2004 to 5.88% in 2007 and 6.31% in 2008. When oil prices peaked in July 2008 PCE hit a maximum monthly level of 7.01%.
Thus taking the increase from 2007 to the highest month in 2008, energy PCE rose by 1.13 % of total PCE, or about $115 billion on an annualized basis.
That sounds like a lot of money, but it's well under 1% of GDP.
For example, it's less than the estimated $152 billion cost of former President Bush's ineffective 2008 tax rebate stimulus.
Indeed, it is one-seventh the size of President Obama's stimulus the following year, which didn't have much visible effect. Thus the high oil prices of 2008 might have made the difference between marginal growth and marginal decline, which according to the "butterfly effect" of chaos theory could have caused other larger changes.
However, high oil prices were certainly not sufficient to push an otherwise healthy economy into recession.
2007 vs. 2012: Comparing High Oil Prices This time, oil prices are rising from a higher base.
The average West Texas Intermediate oil price of $94.87 in 2011 was 31% above 2007's average. It follows that an oil price jump to $147 would not be very economically significant.
In this case, we would need a larger spike to have any noticeable effect.
Oil prices did spike 101% from 2007's average to the peak on July 3, 2008. A similar rise from 2011's average would take the price of oil to $191 per barrel.
If that jump raised energy PCE by the same proportion as in 2008 (starting from 2011's higher energy PCE of 6.07% of total PCE), it would push it up to 7.24% of PCE. This equates to a rise of about $129 billion.
If oil touched $200 a barrel, the rise in personal energy expenditures might be around $140 billion.
Again, at 0.9% of today's GDP that increase is just not big enough to cause recession in an economy growing even moderately.
It's just a little larger than the $118 billion "stimulus" from continuing the payroll tax cut for 2012.
It would slow growth, but given that we are currently experiencing growth of around 2%, it would not turn our current growth into decline.
With Federal Reserve Chairman Ben Bernanke's zero-interest-rate policies in place until 2014, and the chance of yet more "stimulus," it is indeed possible we will see oil at $200 per barrel.
The price could get there gradually, over the next 12-18 months, or it could leap there in one bound, if Iran closed the Straits of Hormuz. That would be very unpleasant, pushing gas prices up to $7 per gallon.
But the above calculation shows that on its own $200 oil would not push the U.S. economy into recession.
Indeed, we should not expect it to; Europe has suffered from gas prices of $8 to $10 a gallon for several years now. While the European economy has many problems, it seems to survive its gas prices.
So we should expect to pay more for gas, but on balance should not expect recession from doing so.
As in 2008, the next recession is much more likely to be caused by the banking system!
I'll take it!
” Why High Oil Prices Even At $200 Won’t Cause A Recession “
Won’t cause a recession because we’re already in one - it could, however, transform the current recession into a full-blown depression....
When you have to pay more for gas to get to the grocery store to pay more for groceries and every thing else you start scrimping. That shows up in the overall economy.
Is this guy just looking at what people pay out at the pumps?
Is he not looking at all the other products (including heating oil) that the high cost of oil is pushing up? Everything you buy is going up due to transportation costs.
This article is breath-takingly stupid....museum quality stupid. $7 gas will ensure a recession and civil unrest. The fact that Europeans pay more is irrelevant. Europeans don’t have the transportation needs or housing patterns we do. $7 gas (which means very expensive diesel, too) will also send the cost of food through the roof.
I disagree with his implicit assumption that we are not already in a recession. Yah yah I know it ended in 2009, except here we are three years later and the job situation is only getting worse each month.
That said, oil at $200 a barrel leading to $6+/gallon gasoline will take the last few dollars of any number of people and small companies still trying to get by — commuters, contractors driving from job to job, any delivery service, etc.
It’ll cause a Flukeing recession at my house...that’s enough.
In my economy, higher gas prices have done great harm. None of the people care about what some dude calling himself an oracle thinks.
We just know that our money is disappearing with high food and gas prices.
No vacations or fun anymore. Obama is responsible for that.
May he rot in a dark place.
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If Americans would drill more then expensive oil would be good for the economy. Here in Canada, the value of the dollar rises and falls with the price of oil; several years ago, when our dollar was worth $0.70, a Royal Bank economist predicted that our dollar would reach par when oil hit $100. Our dollar passed parity when oil was ~$98.
Stupid article written by a complete dumb-ass.
“With Federal Reserve Chairman Ben Bernanke’s zero-interest-rate policies in place until 2014, and the chance of yet more “stimulus,” it is indeed possible we will see oil at $200 per barrel.”
Just as long as Federal government salaries and free transportation stays above the effects....As for the rest.....
.....ride bicycles, like China.
This comparison is quite incompetent. The attentive observer would immediately want to know how many gallons per year are bought by the average euro vs the average American motorist. What percentage of disposable income would 8 to 10 dollar gas absorb from the average American vs the gas bill for the average euro.
The average mileage for Americans is from 12 to 15,000 miles per year. For the UK, by comparison, it is around 9200-9500 miles. With better mileage per gallon, most likely, as well. Probably even less on the mainland.
Breathtakingly stupid - I couldn’t have said it better myself.
I’m sure that for old Marty...the price of hi-test for the 5 series Bimmer is a pretty irrelevant day to day expense.
However...for the rest of us peons and peasants.....it’s becoming ever more the bulk of our discretionary income.
Tell that to the guy at the corner deli where I used to buy my coffee and bagel in the morning, my lunch in the afternoon. The cost of gasoline prevents me from stopping in his store, I now bring a thermos and pack my lunch and my friend at the deli no longer gets $60 - 80 a week from me. I know I’m not the only customer of his who is forced to do this.
What could prevent a normal pullback from morphing into a larger S&P-500 index correction? Traders havent given up hope that Fed chief Bernanke would ride to the rescue with another big juicy blast of QE, in order to keep the stock market addicts sedated at artificial highs. Yet Bernankes dilemma is, another big round of QE could also catapult Brent crude oil to $150 /barrel, and topple the world economy into a synchronized recession. Oh what a tangled web we weave when first we practice to deceive, -- Sir Walter Scott.
The Bull Market needs another fix.
I think the muppets are catching on and this guys article isn’t going to fly ... Mrs. Muppet said so and I trust her intuition.
Ya gotta love economists.
Martin O. Hutchinson is a Contributing Editor to both the Money Map Report and Money Morning (http://www.moneymorning.com/). An investment banker with more than 25 years experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institutions derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. But it was Hutchinsons work in Bulgaria, Croatia and Macedonia that solidified his reputation as a true ...More hands-on expert on the developing economies. As the U.S. Treasury Advisor to Croatia in 1996, he helped the country establish its own T-bill program, launch its first government bond issue, and start a forward currency market. Hutchinson returned to the United States, was named Business and Economics Editor at United Press International, and was able to jump-start the financial-news operation of that historic wire service. In October 2000, Hutchinson began writing The Bears Lair, a weekly investment column that appears on the Prudent Bear Web site. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
Funny - I don't see anything in that resume that leads me to believe that Martin will ever have to worry about getting the scratch to put petrol in the ol' gas tank.
AND ANOTHER THING. Looks like Martin has got a guaranteed paycheck in the event of a severe recession or depression, so he gets to put on the Alfred E. Neuman face all day long.
What do the peasants do?
Everybody lies about sex. This kind of crap reminds me of how the MSM covered for Clinton. $200 bbl for oil would be a disaster. This idiot can talk about the macro effects of higher prices for oil, but it would amount to a huge regressive tax on most Americans who are living from pay check to pay check and it would suck huge amounts of discretionary income from the economy. And the prices of goods shipped by truck and agricultural products will go up.
Energy is the life blood of any modern economy.
Everything uses energy, from computers and lighting to manufacturing and transportation. The cost of energy ripples through everything.
You have to be an economic moron to think an 80% increase in the cost of energy won’t devastate the economy.
This guy is truly incompetent. It amazes me that someone can write this shallow tripe and pass as an expert. Isn’t the internet wonderful?
If he wants to see what a $200 dollar barrel of oil will do to the economy, he should look at how much oil the whole country consumes, not just what a consumer uses for gas.
The US uses 19.6 million barrels a day. If you multiply that by 365 and then by $100 (the increase from the current level) you will come up with $715 billion - that is a hell of a lot more than the the $115 he came up with. And this doesn’t count the multiplier effect. Also most of those dollars go to foreign countries.
Of course to do the full analysis one would have to consider what happens to those $715 billion dollars spent on oil. At some point those dollars will have to be spent back here in the US. In fact they may never leave the US - they may go into some arab or canadian US bank account, where it may sit there or more likely it will buy US treasuries.
Whatever happens to them, they will probably not circulate among the consumers as when the consumers spend that money themselves. Whereas consumers would use that money to buy groceries, cars, TVs go to movies, restaurants etc., the companies that sell oil may instead invest it in financial instruments or perhaps some capital goods. So it will cause a fairly large disruption and dislocation in the economy that would most likely be felt as a recession.
Oil prices are like the level of water in a river. If oil prices are low then it raises the river allowing for free navigation of boats. If oil prices are high it lowers the water level in the river, exposing rocks which can sink boats (or at least make navigation tricky). The rocks and debris in the river might be what destroys navigation but the level of water in the river is what exposes the rocks.
He's hoping that consumers will ignore high gas prices and continue to spend like crazy (putting expenses on the ole' credit card) until after the election when 0bama has been re-elected. Then he doesn't care what happens.
I spent part of Wednesday morning listening to Robert McFarlane, Reagan's national security adviser, discuss oil prices. (He's endorsing Sarah Steelman, one of three Republicans running for the US Senate against Clare McCaskill.)
Frankly, I'm scared by what McFarlane said. His key point is that with increasing oil consumption by China and India, the OPEC cartel is no longer restricting oil production to keep prices up but because they can't produce any more. In other words, no matter what Obama may or may not do to promote higher oil prices to reduce “greenhouse gas,” it may be beyond his control, OPEC’s control, or anyone else’s control due to the growth of the Indian and Chinese economies.
I know what Korea is like, with gas prices so high that trains and urban public transit are necessities. They had the luxury of being able to build cities designed for public transit since even the large cities like Seoul had populations of only about 50,000 at the end of the Korean War, and mass urbanization could be planned with the modern economy in mind — including lack of domestic oil production forcing very high fuel prices.
Our American economy as it currently exists is not viable if gas prices get to that kind of level, and the hundreds of billions of dollars it would take to build mass transit in post-WW2 car-driven cities like Los Angeles is not financially possible.
Yes, I know our economy will eventually figure out alternatives to a gas-driven single-occupant car system of transit, and I know that in the short term, lots of commercial goods will start being transported by train rather than truck if fuel prices skyrocket. But we're kidding ourselves if we think the economy won't take a massive hit from high fuel prices.
Also, people there can commute by train etc. (shorter distances) or use smaller, more fuel efficient vehicles. We mostly can't...