Wall Street and academia are two fields that publish a great deal of research, albeit for different objectives and audiences. Wall Street has a tendency to emphasize mainline research, a process that produces a great deal of specialized, up-to-the-minute research, but one that also can sometimes overlook -- even intentionally exclude -- research by niche or lesser-known researchers.
In focus: oil
One example: oil prices and the U.S. economy. Wall Street abounds in research describing oil's impact on U.S. GDP. As most investors/readers know, the current consensus holds that as oil prices rise, the U.S. economy slows, and if it rises too high it can throw the economy into a recession.
Further, numerous studies and analyses have empirically explained why the U.S. economy has slowed -- but not fallen into a recession (at least not yet) -- with the march of oil past $80 per barrel. (Oil closed Monday up 60 cents to $89.31). Previous oil shocks, in 1973-74 and 1979, preceded U.S. economic recessions.
Economists have (correctly, in the view of many) cited the nation's improved energy efficiency, oil's lower percentage of gross domestic product, and the typical American household's increased purchasing power as reasons why, despite continually high oil prices in 2007, the U.S. economy has managed to chug along, albeit at a slower pace.
Still, Wall Street may be overlooking a theory, one that may contain insights that both help explain the anomaly and that illuminate.
The Leeb Thesis
Author Steve Leeb, senior editor of The Complete Investor newsletter (subscription required), argues that the reason the U.S. economy has not fallen into a recession this time is that the current oil price run-up has been gradual, relatively speaking. During the 1973-74 oil shock, oil's price quadrupled in less than 9 months. During the 1979 oil shock, it rose 265% in a year.
In comparison, during oil's rise this decade, oil has risen 45% in 2007, and about 107% since January 2005. To be sure, those are not insignificant increases, but they are not sudden increases.
In other words, during this run-up, we haven't seen the sudden, large increase in the price of oil that characterized the 1973-74 and 1979 oil shocks (and that's the reason why, quite aptly, those events are called "shocks").
Leeb argues that this is the main reason the U.S. economy today has been able to keep growing (but the economy has slowed with oil's continued rise in 2007).
Oil Analysis: Leeb offers considerable evidence to support his thesis, and it behooves economists and Wall Street analysts to incorporate his assumptions/projections into their models, at least as part of a research guide outlining various theories regarding oil impact scenarios. Further, in addition to economic impact studies, more research is needed as to why another oil shock hasn't occurred (at least not yet).
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Reader Comments (Page 1 of 1)
12-03-2007 @ 7:27PM
Alnusw said...
Mr. Leeb is full of it. The only thing that has propped-up the Economy was the Fed's half percent rate cut and it's running out of steam. Prices are rising as a result of high fuel costs but wages are not. This imbalance will ultimately lead to recession or worse. With little in the way of Public Transportation, people may soon not even be able to drive to work.
12-03-2007 @ 7:57PM
Brian said...
If Oil is at $89 a barrel then Gasoline should be about $2.70 right now.
Why is it when oil goes up Gas jumps by 25 to 50 cents a gallon???
But when oil goes down the price of Gas only goes down 2 or 3 cents ???????
Why are the oil companies Gouging Americans ?????
12-03-2007 @ 10:13PM
moon said...
Oil is a commodity the more a commodity is used the more its demand it's called supply and demand strict business stat, then add a glut and a ravenous desire for that commodity therefore prices soar as demand rises bottom line supply and demand demands the supplier to produce more at the advantage of the supplier creating greed witha happy smile on the suppliers face all the way to his bank account ! get it? lol ice cream is created from a cow oil is sucked up out of the cow earth, it costs more to suck than squeeze lol !
12-04-2007 @ 8:03AM
wally said...
With oil at these prices, why isn't the Government spending more research money in the oil shale in Rocky Mtns. We have more oil there than rest of the world........