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Oil’s Surge Causing Major Changes in US Economy
Reuters via CNBC
Oil’s relentless price rise has pushed U.S. drivers off the road, curbed consumers’ appetite for expensive goods, forced airlines into their deepest cuts in years and threatened car makers with a flood of red ink.
It all points to a dramatic shift in the U.S. economy as oil’s surge above $130 per barrel forces already cash-strapped households and companies to rethink business as usual, and the changes are likely to be lasting, even if energy prices retreat.
“The weakness in the United States economy in housing, that we have read about for over a year, with the mortgage crisis and credit crunch, was one blow. But oil is another blow, and it’s probably one blow too many,” Dow Chemical Chief Executive Andrew Liveris told Reuters.
(23 May 2008)
What If Gas Cost $100 a Gallon?
Robert Rapier, The Oil Drum
… Lately I have been thinking of another thought experiment. What would I, personally, do if gasoline was $100 a gallon? Now that may seem silly. Nobody thinks we are going to have to deal with gasoline at $100 a gallon. But that misses the point of the thought experiment. When I ask people at what price point gasoline is going to have a major impact on their lifestyle, that seems to be a moving target. When gas was $2, they said $4. Now that gas is $4, many have realized they won’t make big changes at $10. Oh, they might buy a smaller car, but they aren’t going to start walking 3 miles to the store. A friend who drives a Suburban recently told me that he doesn’t care about gas prices; that he is going to keep driving at the same rate regardless. I bet he would have a change of heart if gasoline was $100 a gallon.
So the point is to jump so far out there – $100/gal – that there is no question that 99% of us would have to make some serious changes. The thought experiment is mainly designed to flesh out how people might cope as gasoline becomes more expensive and as we go down the depletion curve. This is already reality for some, as your $100/gal dilemma is someone else’s dilemma at $4/gal.
What I would like is to hear how you would cope with $100 a gallon gasoline.
(26 May 2008)
Much discussion at original.
Oil prices (audio)
Paul Barclay (presenter), Australia Talks, ABC
The Government and Opposition are struggling to come up with strategies for rising fuel prices but is this an issue that’s outside domestic control? The Rudd Government has now announced that it will consider cutting the GST on fuel excise in an attempt to reduce the cost of petrol. The surprise announcement at the weekend came after Opposition Leader, Brendan Nelson promised that a Coalition Government would cut the excise making petrol five cents a litre cheaper. Neither of the promises is as yet fully costed. So what are the political, economic and social ramifications if, as some predict, oil is about to hit $150 a barrel?
Guests
Gavin Wendt / Head of Mining and Resources Research, Fat Prophets
Malcolm Farr / Political editor, Daily Telegraph
Belinda Robinson / Chief Executive, Australian Petroleum Production and Exploration Association
Jeremy Leggett / Chairman of Solarcentury, UK
Bill McKinnon / Motoring Writer
(26 May 2008)
Contributor Michael Lardelli writes:
Australia’s national treasure, the ABC, had some interesting programmes on Monday evening. “Australia Talks” talked oil with had a mix of interviews and talkback. It featured Jeremy Leggett and others.
Oil Revenue and Sovereign Wealth Funds (audio)
Kris Short, “Late Night Live”, ABC (Australia)
Some experts are blaming it on growing demand and tighter supplies. OPEC insists it’s supplying more than enough oil, while economist Joseph Stiglitz blames the war in Iraq. Whatever the cause, with the price of oil reaching over US$130 a barrel and no sign of the market falling, the oil-rich countries are raking in billions. Where are they putting all this money and how will they spend it?
Guests
Gal Luft
Executive Director of the Institute for the Analysis of global Security in Washington, D.C.
Michael Klare
Five Colleges Professor of Peace and World Security Studies, at Hampshire College, defense correspondent for The Nation Magazine.
(26 May 2008)
The oil discussion starts about 12 minutes into the audio.
The Consequences of Rising Oil Prices for Producing Countries
Walid Khadduri, Al-Hayat
… it is essential to point out, especially for Arab readers who may think that the increase in prices benefits the countries of the region, that this is a wrong and shortsighted impression, and that producing countries bear an unavoidable responsibility to global consumers. Despite the massive financial rents earned by oil producing countries from these prices, prices have serious political and social consequences for the international community in the foreseeable future rather than in the long term. This is attributed to the fact that the capacity of citizens earning limited incomes to absorb these high prices of fuel is limited. This citizen will start to feel the impact of prices on his family budget and will start wondering, if he has not already done so, about the percentage of his income that he can spend on the family food, gas, heating fuel, and electricity.
These are unavoidable living-related questions that will eventually be brought in front of oil-producing countries, resulting in pressures and obligations. It is worth mentioning that officials in oil countries, especially those that are OPEC members, have adopted a rational and wise policy to raise the price of oil from the $20-25 range where it hovered for years. They never expected the current high level of prices or planned it. However, what they effectively face today is market fundamentals, namely the forces of demand and supply, running out of control with respect to price levels. Additionally, they face responsibility for other factors that influence the markets, including:
(26 May 2008)
Oil firms are weeks away from bankruptcy
Murali Gopalan, DNA MONEY
There was no diesel for a day at a gas station in north India recently. The public sector oil companies are slowing down the issue of new gas connections to households. The private sector oil companies are closing down petrol pumps and exporting petrol and diesel. Kerosene is not easily available in the public distribution system; the open market rate is around Rs 30 a litre when the official rate is under Rs 10.
If you think these are isolated events, think again. A fuel shortage looms ahead of the nation as the oil companies rapidly head towards bankruptcy.
With international crude oil prices hovering around $129 a barrel, the country’s three oil marketing companies – IndianOil, Bharat Petroleum, and Hindustan Petroleum – are collectively looking at losses of Rs 200,000 crore this year
(21 May 2008)
Damage Control
Peter McKenzie-Brown, Language Instinct
… Three Theories: Historically, rapid increases in oil prices have led to global recession. This certainly applies to the stagflation that influenced the decade after the energy crisis of 1973. The terrible recession of 1982-83 was without doubt related to the energy crisis of 1979-80. And the long, gradual boom that began after ’83 was closely tied to declining oil prices, including their collapse in 1986.
What I think we need to ask ourselves is why high oil prices don’t seem to be doing a lot of damage to the global economy. According to The Economist, there are three possible explanations.
An important and interesting idea is that high oil prices are not hurting the economy simply because they are the result of rapid economic growth around the world. “Rather than oil harming the global economy, it is global expansion that is driving up the price of oil.”
Another explanation is that developed economies are more efficient in their use of energy, thanks partly to the increased importance of service industries and the diminished role of manufacturing. For example, the EIA has calculated that the energy intensity of America’s GDP fell by 42% between 1980 and 2007.
Another theory is that the oil-price rise has been steady, not sudden, giving the economy time to adjust. The Economist writes, “Giovanni Serio of Goldman Sachs points out that in 1973 there was a severe supply shock because of the oil embargo, when the world had to cope with 10-15% less crude almost overnight. Not this time.” It’s worth adding that during 1979-80, the percentage increases in oil prices were not as great as they were in the early 1970s, but in absolute terms the increases were greater by far.
The Role of Emerging Economies: As Marcel Coutu explained at the beginning of this article, the most important factor for higher prices has been the shift toward greater consumption by developing economies.
While the US, for example, has responded to high prices by cutting decline, slightly – according to one source, the decline will be 1.1% this year, such that American consumption next year will be no higher than it was in 2004 – demand from China and other emerging markets is more than offsetting this shortfall. With supply growth sluggish, the steady increase in demand is hauling prices remorselessly higher. It would take a recession in emerging markets to drive commodity prices substantially lower, and to date recession is not in the cards.
A couple of points deserve comment here. One is that the achievements of Western nations in reducing energy intensity are nothing compared to the achievements of China. According to an excellent paper on China’s energy consumption and demand , since 1980 China’s energy intensity has dropped by about 75% – nearly twice the drop in the US. The reason is that in every way the country has become far more efficient.
Of course, I am raising this point because it suggests a very deep irony: Exporting the world’s manufacturing sector to developing countries has not only enabled the West to become a more efficient energy consumer. It has also helped those countries to become more efficient. Don’t blame the Chinese, in other words: They are doing a far better job at using the world’s resources efficiently than the West can even imagine.
(26 May 2008)
