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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.
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.
and when the poor go on welfare because they lost their jobs because they can no longer afford to drive to work and back and still pay for food and rent???
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.
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