The oil syndrome

Posted Feb 20th 2008 7:00PM by Joseph Lazzaro
Filed under: International Markets, Politics, Commodities, Oil, Recession

The economic landscape -- particularly for the United States -- certainly looks different than it did 30 or 40 years ago.

Globalization, the internet, and the rise of a second major economic power in Asia are all developments that would look rather odd to someone in, say, 1973-74. The world in 2008 is one characterized by economic change -- one that may usher-in even more historic political change in the months ahead.

But there has been one constant between the two eras (overlooking cyclicality): the price of oil. It was high, in real terms, in 1973-74, and it's high now. And one thing economists like Glen Langan know regarding economic conditions when oil's price is high -- it simply makes the cost of moving things, the cost of doing pretty much everything, more expensive. Whether it's dropping the kids off at little league baseball or at soccer practice, or transporting a supply chain order of refrigerators across the country, a high oil price "simply increases the cost of motion," he said. And there are few positives for the U.S. economy. Further, it takes dollars that could create spin-off economic effects -- disposable income that could be spent somewhere else -- and simply removes them from the economy.

Still, that's not to say there aren't economic winners when oil prices are high. There are economic winners -- increased petrodollar wealth in oil producing states (enhancing economic development in those nations and regions), increased earnings for oil companies, and efforts to improve energy efficiency, are three, among other winners.

But the net effect for the United States economy, short-term, is negative, Langan notes, so long as it remains dependent on oil and gasoline obtained from current sources. Oil closed Wednesday at $100.74 per barrel, a record-high close.

Moreover, while correlation is not causation, Langan is quick to point out the contraction forces inherent in high oil prices. Sustained high oil prices were, at minimum, a major factor in the recessions of 1973-74, 1980-81, and 1990-91. The March-November 2001 recession is the only one of the last four in which economists could not cite a high oil price as a factor.

True, the U.S. economy is markedly more energy-efficient than it was in 1973-74: energy as percentage of GDP is much lower. But that does not negate economists' oil shorthand, Langan said. Low oil price? Conditions are conducive to U.S. economic growth. Moderate oil price? Reduce GDP by about 1 percentage point. High oil price? Guaranteed economic sluggishness, if not worse.

Given the net-negative of a high oil price for the U.S. economy, it's perplexing that the nation hasn't, in all these decades, sought to develop some other technology or energy source for transport, at least, Langan said. "From an economic standpoint, oil's created problems, again, and again, and again," Langan said. "A lot of problems."

And note that Langan didn't mention foreign policy or climate.

Tags: 1973-74, 1980-81, 1990-91, Africa, alternate energy sources, Asia, climate change, economic growth, emerging markets, Europe, foreign policy, gasoline, gasoline prices, GDP, globalization, heating oil, Internet, inthenews, Latin America, Middle East, oil, recession, renewable energy, U.S. economy

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Reader Comments (Page 1 of 1)

2-20-2008 @ 7:19PM

FRED said...

IT DOES NOT TAKE A ROCKET SCIENTIST TO KNOW THAT THE PRICE OF OIL IS BEING MANIPULATED TO HURT AMERICANS. THOSE AMERICANS IT DOES NOT HURT ARE IN POSITIONS TO CHANGE THE PRICE BUT GREED ALLOWS THEM TO PLACE MORE BURDENS ON THE WORKING PEOPLE.

COUNTRIES NATIONALIZE OUR INTERESTS IN THE MID EAST AND WE MADE BILLIONAIRES OUT OF PEOPLE WHO DO NOT LIKE US.

MAYBE SINCE OIL AFFECTS OUR NATIONAL SECURITY IT IS TIME FOR US TO NATIONALIZE IT. I KNOW IT WOULD BE STRENUOSLY FOUGHT BY CHENEY AND BUSH PLUS THOSE EXECS MAKING 40-50 MILLION A YEAR OFF THE INFLATED PRICES. GO NATIONALIZATION OF EXXON, MOBIL AND IF NECESSARY NATIONALIZE SAUDI ARABIA.

2-20-2008 @ 7:25PM

FRED said...

OIL IS OUT OF CONTROL, OUR MILITARY BUDGET WILL BE EATEN UP BY IT AS I SAID EARLIER IT IS TIME WE SET THE PRICE $60-70 PER BARREL IS SUFFICIENT.

WE PAY TAXES FOR SERVICES OUR ENTIRE ECONOMY CAN FAIL. PEOPLE CAN NOT SAVE MONEY WHICH WOULD BE PLACED IN BANKS TO LEND WITH WHEN OIL IS SO HIGH. TO THE FED QUIT LOWERING THE INTEREST RATE, LOWER THE BOOM ON OIL PROFITEERS.

2-20-2008 @ 9:08PM

larry said...

don't worry so much fred. the war on terrorism will be over soon and Iraq will form a true democracy with alliances formed between Israel and the Islamic countries and we'll leave to pursue the formation of the North American Union, conquer Venezuala, sieze their oil fields and everything will be honkydory. If the peace in the Middle East doesn't hold we'll move Israel to Acapulco, drain the last dime out of China and Indonesia and the trade will be sogreat that we won't be able to keep black top on the NAFTA super highway!

2-20-2008 @ 9:18PM

larry said...

Oh Fred, I forgot to mention that EXXON will take over the oil operations in Venezuala and all of this will be compliments of the CFR financed by the Rockefellers who of course have no stake in any of this and are doing this strictly as an act of patriotism.

2-20-2008 @ 9:37PM

larry said...

And Fred, last but not not least it really isn't about oil. The powers that be could care less if the car of the future was a coal fired locomotive. As long as there is a place to swipe your credit card and pay interest on the purchase at the pump or the coal bin, even if its only one day of interest, the "Velocity of Money" must be maintained. It's about money Fred, the velocity of money.

2-20-2008 @ 10:35PM

Alnusw said...

Congratulations Mr. Lazzaro. How refreshing to here the truth for a change - that Oil price manipulation is ruining our Economy. But it's not just the Oil Companies. The Commodities Traders are the ones who keep pushing the prices up while indicators show they should be dropping. Its real simple - the Government has the Constitutional Authority to control the prices or suspend trading of Oil or any other commodity that threatens this Country's Economy. A hundred years ago, Oil accepted Gov't Price Supports, causing them to now be vulnerable to Controls. Free Enterprise has its limits.

2-21-2008 @ 12:03AM

Birdfunk said...

Largely correct Alnusw, but it is the high prices themselves, not 'manipulation' that is stinging us.
And yes, speculators drive the volatility of all commodities, and there is also a 'geopolitical fear' premium which adds $20 to $30 per barrel of oil. A
deep US or global recession could crash the price,
maybe to $50/Bbl, until economic growth resumes. If (global) growth does not resume, can you imagine the myriad of possible reasons? tbc

2-21-2008 @ 12:22AM

Birdfunk said...

In 1979, OPEC exclusively held the power to manipulate oil prices. They still have influence, but only at the margin, since they, like everyone else, are producing near full capacity. Oil, wheat, copper and most all commodities' markets are the perfect examples of 'pure competition.' This means you can sell all you can produce at a market clearing price, but raise your price above the market, and you sell nothing. Gasoline is a great example, but it varies by region, state and regulation (huge mess).

2-21-2008 @ 12:33AM

jrb47 said...

What makes me angry is that as a nation we have never dealt with the fact that the supply side of the supply/demand equation is manipulated by a powerful cartel ( OPEC ). It seems to me we are about 35 years late in doing everything we can to manipulate the demand side of the equation.
If we could cut our use of oil then we would be buying less and it would be at lower prices . Then the price goes even lower because our $ gets stronger . The net effect to our economy would be far greater than this stupid stimulus package. And the this stimulus is FOREVER. My opinion.

2-21-2008 @ 12:42AM

Birdfunk said...

Natural gas is different, it depends on pipelines and local markets. LNG is a tiny slice. A few months ago producers received $7-$9 per Mcf in the gulf coast regions and Appallacia, while Rocky Mtn. producers had to shut-in their fields since they were getting as little as $.25/mcf. Today things are closer to balance, but only because new gas pipelines have come on stream in the Rockies. A few facts: In real inflation adjusted dollars oil is still 10% cheaper compared to 25 years ago; milk is 17 times higher; Microsoft is 4 times more profitable than Exxon/Mobil, and MS is a monopoly.

2-21-2008 @ 1:01AM

Birdfunk said...

Hate to bear bad news, but gasoline prices have not kept up with oil. Refiners buy oil to make gasoline, heating oil, jet fuel, asphalt, plastics,,,,. That's why the stock prices of the refiners have crashed. Their margins evaporated. Valero was over $100, now ~ $70? Should have bought the drillers and service companies. The cost to drill new wells has increased much faster than oil prices. And so have their stock prices. Look at Valero vs. Schlumberger! Here's simple economics:
For every $100 Exxon spends, they make $10 of profit. For every $100 Microsoft spends, they make $40 of profit. Don't let the braindeads turn you into a chump!! I'm done for now. Wake Up!!

2-21-2008 @ 1:13AM

Birdfunk said...

JRB, Of course you're right. We've done nothing all these years to develop our own vast reserves, not only to reduce our dependence, but to give all these new technologies a chance to commercialize. If our (dreaded) big oil companies had been allowed to drill (no spill) 20 years ago, we'd have billions of barrels coming on right now, not to mention trillions of cubic feet of clean natural gas. Witness Brazil's new elephant, or our
own Anadarko Independence Platform in the Gulf.

2-21-2008 @ 1:26AM

Birdfunk said...

An interesting piece of history, as I close (and get to work): Ronald Reagan worked closely with the Saudis in the 1980's to convince them to ramp up production so as to crash the price of oil, knowing it would put tens of thousands of US oilfield workers out of work, and bankrupt 100's of independent oil companies. It worked like a charm.
Why did the greatest capitalist since Teddy R do this? To bankrupt the Soviet Union, who were spending like mad to counter his once ridiculed Star Wars Missle Defense System. That's how He won the freakin' cold war, and that's how the Navy whacked the renegrade satellite tonight!! Bravo!!!