Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why High Oil Prices Even at $200 Won't Cause a Recession

Commodities / Crude Oil Apr 12, 2012 - 07:43 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin 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!

Source :http://moneymorning.com/2012/04/12/high-oil-prices-even-200-oil-wont-cause-a-recession/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Simon
15 Apr 12, 00:27
Gas Price Comparison

Reference many European countries which have "suffered" from gas prices of $8 to $10 for several years:

Your typical European vehicle is a highly efficient and new (ie: less than 3 years old) 1.4 liter or 1.6 liter gasoline or diesel car, capable of up to 75mpg. Many smaller cars are even more fuel efficient, with some returning over 80mpg. Even allowing for the larger imperial gallon, these fugures are extremely impressive.

So, do the math: A heavy and ungainly SUV returning 20mpg at $4 per US gallon. Or a small and efficient 1.4 liter hatchback returning say 60mpg at $8 per European gallon.

The fact is that Americans have always been in love with their big cars and demanded cheap gasoline. Europe has always suffered from high gas prices, mainly because up to 80% of the price at the pump is sales tax. However, this has resulted in European carmakers being much more creative for a long time in designing smaller and more fuel efficient vehicles. US carmakers, on the other hand, are only just waking up to the fact that pump prices are rather more important than have been for over 50 years.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in