Rising Oil Price Could Slow or Kill Economic Recovery 32 comments
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There was plenty of good news circulating yesterday, helping to push markets upward. Wells Fargo (WFC) reported a first quarter profit, and America’s trade deficit fell to its lowest level in nearly a decade. In fact, neither piece of information is that good. Wells profit may be have been boosted by some generous payments from AIG, and the trade deficit decline is a function of us exporting our pain to struggling economies in Europe and Asia. Still, it’s enough to move markets. Profitable banks can get busy earning their way out of the hole they’re in, and a declining deficit will reduce the drag net exports will place on first quarter output numbers (and move us toward a more balanced economy).
But there’s a problem embedded in the data. The trade deficit in February was about $26 billion, but the non-petroleum deficit was less than half that. Take out oil, and we’re dangerously close to a trade surplus. But as Calculated Risk notes, the import price of oil was $39.22 in February, down a tad from the level in January, and down an extraordinary amount from the level last summer. But yesterday’s news was good, and helped boost expectations for the path of economic growth. Unsurprisingly, then, oil is up along with everything else, trading over $52 per barrel where just a few days ago it was at $48.
There are several implications here. One is that oil prices are extremely sensitive to economic growth — the more so since low recent prices and the credit crunch served to disrupt a lot of exploration. As the global economy recovers, so too will oil prices, and fast. That increase is going to cut the legs out from under a recovery; a rise in oil prices is like a tax increase, which is contractionary. And if we nonetheless manage to grow through the rise, the increase in prices and oil demand will expand the trade deficit once more.
I don’t think it’s that hard to work around these issues. We could pass a substantial gas tax increase now to take effect in two or three years. In expectation of the increase, consumers would purchase more fuel efficient automobiles, potentially boosting auto sales and reducing vulnerability to high oil prices. And I’m sure I don’t even need to say that a program of rapid expansion of transit and passenger and freight rail capacity, funded immediately by deficit spending and after recovery by gas and congestion taxes, would kill multiple birds with one stone — providing stimulus, facilitating structural shifts, and reducing exposure to rising oil prices.
Rising oil is a threat. It will slow or kill recovery, and depending on how the Fed reacts it could generate uncomfortably high levels of inflation. And it’s not like getting off of oil is in anyway counter to long-term goals; climate change perpetually looms in the background. Let’s see some attention paid to this.
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Still, isn't it a little early to be worrying about "killing the economic recovery"? It's not even clear to me that we're in one yet.
On Apr 10 10:02 AM old trader wrote:
> I think the author is correct in his assumption that an increase
> in oil prices can stifle any economic recovery, but only up to a
> point. It depends on how fast the price rises, and to what level.
> If one goes back a couple of years, the economy did fine up with
> oil as high as $100/bbl. It was only as the price continued to march
> steadily higher towards $150/bbl, that energy prices constituted
> a serious economic drag.
>
> Don't forget that the energy sector is also a part of the economy,
> and a healthy sector generates jobs and corporate profits. If oil
> were to rise at a moderately prudent rate to a range of $60/$80 bbl,
> I think that would be something of a "sweet spot", in terms of being
> high enough to return health to the sector, while not being high
> enough to throttle the efforts to turn the economy around.
The 12-month moving total for January is the lowest traffic volume (2,916 billion miles) in any month since February 2004. Further, the 110 billion mile reduction in the 12-month moving total since January 2008 (3,026 billion), represents about a $16 billion reduction in fuel costs for American drivers, at an average fuel efficiency of 23 m.p.g., and an average fuel cost of $3 in 2008. And yet gas is on the rise.
On Apr 10 02:19 AM Duderonomy wrote:
> Either that or it would pave the way for Baard Energy to proceed
> forward with their Ohio River Clean Fuels project that would lead
> to our energy independence from Middle Eastern oil. Imagine a 2 billion
> dollar investment in a plant that would employ about 500 individuals
> at the plant itself, not to mention the thousands that would be reemployed
> at the mines that are currently closed due to the low cost of coal.
>
>
> www.baardenergy.com/or...
If I had to make a Full Disclosure, I'd have to list some 50 stocks, ETFs, PFDs, Bonds, ADRs, Pink, Bulletin Board, Penny...etc. I'm not about to list or explain the reasons behind them.
Now, as far as sectors are concerned, there are so many. Unfortunately, everyone wants to hear the same thing about their particular "beloved" sector/stock/ETF. Whatever it is, its going Up. Right?
So I should: Obfuscate, distort facts, revise history, make false allegations or Tell the Truth from a Historical Perspective mixed with Charting/Fundamentals.
Since my purpose on SeekingAlpha is to try to get good investing Ideas, I will do my very best to get rid of those whose treat this site as some sort of Blog to Vent, Rant, scam, or otherwise lead astray the SA Readers who have come here in Good Faith. And let me tell you, when I succeed, It feels really, really good.
I get continuous thumbs down from friends of the Departed, its great to see the results of a Job well done.
So I can give you an Instablog if you wish, pick your Topic. I won't obfuscate/scam or tell you what you'd like to hear.
The Blog would be an opinion based on Common Sense if I did not know that much about it or it could be Factual or a mix, again depending on knowledge of same.
But after I accomodate your Request, you will have to do a Similar Post...judging from your previous comments, I know exactly what I'll ask for.
Then there is the interaction between what is a vital commodity with a wholly inelastic supply curve (higher prices do NOT equal more supply) and the capital markets. The higher prices last year (along with lax banking regulation) led directly to this recession/depression. It is unlikely production will ever exceed levels achieved since Q4 2004. According to Liebigs law of the minimum oil is now the limiting factor. Our economies will languish in lock-step with oils decline.
That is unless we get real smart real quickly. But I see no evidence of that. And BTW I am no tree-hugger.
On Apr 10 10:08 AM old trader wrote:
> Btw, before I get jumped on by the tree-huggers who believe alternative
> energy is the only answer, please recall that most, if not all, "green"
> alternatives are only economically viable when compared to higher
> oil prices. Do some reading, and it isn't hard to see how many projects
> have been scaled back/put on hold because they're not profitable
> when oil is at $40/bbl. (unless they receive heavy government incentives).
No, I don't think that oil is "just another commodity", and recognise that there're many factors that play into its pricing. I am a believer in what is currently termed the "Peak cheap oil" theory...i.e., all the low hanging fruit has been plucked from the tree, and additional supply will cost increasing more.
I also find it a bit puzzling as to why NG for use as transport fuel is not visible on the radar scream of oil dependency solutions, since its old, proven technology, with definite green benefits, in terms of pollution.
On Apr 10 08:38 PM Saildog wrote:
> Old trader - it seems your view is that oil is just another commodity
> that the world holds an infinite supply of. Not so. Oil is all about
> physical flows and these are impacted not just by geology, but also
> by economics, politics and several other factors such as an aging
> workforce and obsolete plant.
>
> Then there is the interaction between what is a vital commodity with
> a wholly inelastic supply curve (higher prices do NOT equal more
> supply) and the capital markets. The higher prices last year (along
> with lax banking regulation) led directly to this recession/depression.
> It is unlikely production will ever exceed levels achieved since
> Q4 2004. According to Liebigs law of the minimum oil is now the limiting
> factor. Our economies will languish in lock-step with oils decline.
>
>
> That is unless we get real smart real quickly. But I see no evidence
> of that. And BTW I am no tree-hugger.
NG certainly can/will substitute for oil, but is less energy dense, is less transportable, will require a new distribution network and anyway is subject to its own peak. Just ask the UK. In addition it will not substitute well for diesel and jet fuel, and is also required for fertlizer production.
However it is not the physical limitations that worry me. It is the impact of high energy prices in the economy and the consequent problems in the capital markets. I am concerned that our current complex economy is not viable without cheap and growing supplies of energy.
At a macro level if a greater and greater proportion of economic output is devoted to procuring energy, less is available for reinvestment. And this most certainly will stifle growth!
That is unless we get real smart real quickly. But I see no evidence
of that.
On Apr 10 10:55 PM old trader wrote:
> Saildog,
>
> No, I don't think that oil is "just another commodity", and recognise
> that there're many factors that play into its pricing. I am a believer
> in what is currently termed the "Peak cheap oil" theory...i.e., all
> the low hanging fruit has been plucked from the tree, and additional
> supply will cost increasing more.
>
> I also find it a bit puzzling as to why NG for use as transport fuel
> is not visible on the radar scream of oil dependency solutions, since
> its old, proven technology, with definite green benefits, in terms
> of pollution.
What most people don't seem to understand here is that there are a hell of lot of other people in the market for commodities now. The US makes up only a tiny fraction of the World's population, and most of them contribute nothing of any real economic benefit.
To date American's have been able to buy up the World's resources because the tables have been skewed in their favor. But that is OVER.
The dollar is about to crash. To what level nobody knows. It all depends on how out of hand inflation gets in the US, but it is going mean that everything that gets imported gets a lot more expensive. Further the US is going to lose it advantage of having the World's Reserve currency. It is just not credible that what has become no more than a Ponzi scheme can continue to be used as the main mechanism for exchange in the modern World. It is not even the biggest currency now. Because the Eurozone is actually bigger than the US economy, it is already number two even though it is still more widely held as a reserve currency. But even that is largely due to its IOU status. China and the Arabs would never have built up the level of reserves that they have if the US didn't have such a massive trade deficit. If you start thinking of those foreign reserves more like your credit card bills, then you will start to get the picture.
On Apr 10 01:35 PM drbob66 wrote:
> I agree with "old trader" here...except I would lower the range for
> the "sweet spot" to $50-70. I doubt we'll reach $80 anytime soon
> (except perhaps briefly, on any sustained economic optimism), but
> it feels like we'd still be in a pretty good place if oil were to
> stay in this range. With all the supply still available now, I wouldn't
> be surprised to see it fall significantly from here...but I suspect
> a lot of investors have been buying dips as an inflation hedge --
> and I'll be doing the same if it falls again.
>
> Still, isn't it a little early to be worrying about "killing the
> economic recovery"? It's not even clear to me that we're in one yet.
>
A rise back to those levels, will not be a surprise to consumers.
The dollar is about to crash. Against what currency?
Even the SDR proposals include the USD, If anything the inclusion will keep the USD strong.
The Yen is Down against the USD by about 15% in the last few months and is expected to continue to weaken.
The Dollar may weaken against Gold or as Risk Aversion subsides but otherwise...what currencies will contribute to the dollars demise?
As long as this economic malaise continues, the USD will remain strong due to risk aversion. If Europe were to show signs of recovery faster than our own...different story.
If China/far east recover first, won't matter, they aren't part of the Dollar Basket.
And, If the USA does start showing signs of recovery first, that will only strenghten the USD initially. Dollar weakness? Against what?
HERE's an idea.
Stop being morons and waging war blasting $trillions down the toilet
act like the men you say you all are and live in peace.
THERE's your money!
$5 trillion spent on nuclear weapons, lol. anyone see the absurdity of this? like we would deploy them, hardly, just had to match the soviets in the cold war, what a joke. Never seen grown men play such bad games, grow up, you wannabe's make me sick.
you can't elighten the ignorant.
Point 2: Introducing a gas tax to take effect in 2 or 3 years, as suggested in the article, would actually have negative effects. Firstly, it's doubtful that consumers would go out and buy more fuel efficient cars as a result of this tax. Consumers aren't buying cars to begin with, especially new ones. Secondly, if firms anticipate higher oil and gas prices in the future, then they will simply buy more oil and gas before the date that the tax in implemented, driving up the price of oil and having the exact opposite of the desired effect.
On Apr 11 02:57 AM Dave Wrixon wrote:
> Be lovely won't it, but it ain't going to happen. You are already
> in that zone with no sign of economic recovery.
>
> What most people don't seem to understand here is that there are
> a hell of lot of other people in the market for commodities now.
> The US makes up only a tiny fraction of the World's population, and
> most of them contribute nothing of any real economic benefit. <br/>
>
> To date American's have been able to buy up the World's resources
> because the tables have been skewed in their favor. But that is OVER.
>
>
> The dollar is about to crash. To what level nobody knows. It all
> depends on how out of hand inflation gets in the US, but it is going
> mean that everything that gets imported gets a lot more expensive.
> Further the US is going to lose it advantage of having the World's
> Reserve currency. It is just not credible that what has become no
> more than a Ponzi scheme can continue to be used as the main mechanism
> for exchange in the modern World. It is not even the biggest currency
> now. Because the Eurozone is actually bigger than the US economy,
> it is already number two even though it is still more widely held
> as a reserve currency. But even that is largely due to its IOU status.
> China and the Arabs would never have built up the level of reserves
> that they have if the US didn't have such a massive trade deficit.
> If you start thinking of those foreign reserves more like your credit
> card bills, then you will start to get the picture.