An oil shock is hardly the global economy's best friend

Posted Aug 21st 2008 12:56PM by Joseph Lazzaro
Filed under: International Markets, Oil, Recession

It would appear to be axiomatic to say that there are few benefits from an oil price over $100 per barrel. Nevertheless, during oil's latest climb to the stratosphere, some have argued that a high oil price is 'net-positive for the global economy,' or 'a long-term good thing.'

Economist Glen Langan has a word for insta-analysis like the above. "Misguided," he calls them.

Not that Langan is an ardent advocate of oil use; hardly. Would that the developed and developing world could shift today to an alternate, renewable, and more environmentally-friendly energy form, he says. But the world can't, and as is some times the case in social science circles, "the normative influences the empirical," he says, and leads to curious conclusions like an 'oil shock being net-positive for the global economy.'

For the record: an oil shock is never net-positive for the global economy, Langan argues.

There are some benefits, to be sure, such as increased conservation, increased research on alternate/renewable energy forms, a transfer of some wealth to some developing nations and, of course, astounding increases in wealth in those connected to oil and oil services, but the overall effect is net-negative. Oil traded Thursday up $5.46 to $121.42 per barrel.

Transportation costs soar

"A high oil price makes moving everything more expensive, basically," Langan said. "Transportation costs soar, and because movement is vital to the modern economy, every time this has occurred, global economic growth has slowed. There's a reason it's called an 'oil shock.' "

"The 1973-74 oil shock devastated the global economy; the 1979-80 shock slowed global growth by more than 40%," Langan said. "And during both shocks the United States' economy and much of the developed world fell into a recession."

Fast-forward to 2008: in the early globalization era, some argued, 'This time it will be different.' The rise of emerging markets, particularly economic growth in China and India, and/or energy efficiency, would limit the drag impact of a high oil price. The results? Oil vaults over $100 per barrel, the U.S. economy slows to a crawl (or worse), Europe is in recession, and emerging market growth is slowing, as well.

"The current global GDP slowdown confirms the classic economic theory," Langan said. "A sudden, high oil price is never a good thing. It may speed fuel efficiency, but the economic damage it causes far outweighs anything else."

Economic Analysis: In an ideal world, developed / developing markets would slowly transition to new, preferably renewable, energy sources and gradually phase-out use of oil, with substantial and steady global GDP growth. But the above assumes, among other factors, leadership on alternate fuels by the world's largest per capita consumer, the United States. We'll let the 2008 U.S. Presidential and Congressional elections determine the answer to that key issue.

Tags: 1973-74 oil shock, 1979-80 oil shock, alternate energy sources, Brazil, cars, China, emerging markets, EU, Europe, European Union, gasoline prices, gdp, global economy, globalization, India, inthenews, oil prices, oil shock, renewable energy, Russia, trade, transportation, U.S. economy, vehicles

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Reader Comments (Page 1 of 1)

8-21-2008 @ 4:01PM

Mike O said...

Long term, the oil shock IS good for the global economy. Sure, it's causing a lot of pain right now, but it has been a catalyst for development of alternative energy sources.

Considering that oil is a finite resource and competition for said resource is only going to increase as countries develop, we have no choice but to find alternatives.... the sooner, the better.

These new sources require research, development, and implentation, which creates... new jobs!