Oil-Recession In Late Summer 2011?
A rule of thumb says that a doubling of oil prices over one year leads to a recession. Demand then sinks and prices come down again.
Oil futures for Brent crude were slightly above $124/barrel today. The weekly futures chart shows the current increase.
The price increase over the last six month seems slightly parabolic.
The monthly futures chart allows comparison with the last parabolic increase in 2007/2008.
It reached $150/bl during the summer of 2008, double the $75 of a year earlier. Then a lack of further demand led to a crash of the speculative futures price.
Using the rule of thumb $150-$160 this summer would be double the price of last summers oil and probably cause another recession. Given the parabolic trend in the chart such prices could indeed be reached during this summer.
Global demand during this summer will be higher than usual as Japan will have to burn a lot more oil to replace lacking electricity output from its nuclear plants. The civil war in and foreign war on Libya took only 3% of the world production off the market. But Libyen oil is about the best "light sweet" stuff one can get. One would expect that in this case the Saudis would act as a swing producer and increase their output. But they seem to do the opposite now and it is quite possible that even while drilling frantically they can no longer produce enough high quality spice to replace the lost Libyan output and to stabilize prices.
The U.S. ecomomy with 10+% unemployment has by far not regained its full potential. Another recession would have serious impact on it with strong poltical consequences. With the current congress another Keynsian rescue from a recession, priming the pump with government programs, seems impossible.
Posted by b on April 27, 2011 at 18:34 UTC | Permalink
One would expect that in this case the Saudis would act as a swing producer and increase their output. But they seem to do the opposite now...KSA needs revenue to pay it's citizens the bribe money hence the reason why they have not increased production to compensate and will not increase till late summer.
Posted by: hans | Apr 27 2011 21:01 utc | 2
USA will remain in its current stagnant/anemic growth
Probably worse for Europe due in large part to uncoordinated economic policy in the euro zone.
Also, the decline in demand for consumer goods is bad news for export-led growth in places like Asia. And there is considerable evidence that the yuan will continue to appreciate (one of the interesting theories about appreciation is that the new Chinese millionaires need the yuan to appreciate in order to offset marginally declining trade).
Posted by: slothrop | Apr 27 2011 22:09 utc | 3
My outlook going back years is that US growth would be held hostage to rising oil prices for the foreseeable future. Economic stagnation is currently the only way for the US and Europe to keep some kind of balance between oil supply and demand, hence stable prices.
Serious stimulus would result in strong economic growth resulting in strong oil demand, rapidly rising oil (and food) prices, followed by generalized inflation, and recessions caused by depletion of purchasing power. This is what happened in 2008.
The result of strong stimulus would be herky-jerky economic growth, quick acceleration and quick braking, unless the central banks were really willing to surrender to rapid inflation.
I think the Fed realizes this and is not really all that keen on reflating the economy, because it's counterproductive. Stagnation is preferable. Obama, who seems generally clueless, probably does not want to understand the economic trap he's in.
The problem with scenario is China, which is determined to grow at all costs (who can blame them?) Their growth will drive up oil prices, even before the US has had more than the most anemic of recoveries.
So now I'm revising by outlook for the US to short periods of anemic growth followed by periods of recession/deflation. The current concern is about a "double dip" recession. My prognosis is a quintuple dip recession.
Posted by: JohnH | Apr 28 2011 4:22 utc | 4
world oil reserves are running dry,
but foolish young men are in ample supply;
therefore we conclude it is no great matter
if in stealing the former, we squander the latter.
"I've spent a lifetime defending the flag and the law. Maybe I should have battled less - and questioned more."
- Captain America Comic # 44 Marvel
Posted by: Uncle $cam | Apr 28 2011 5:02 utc | 5
With respect, I think that Obama is sinister, not clueless.
Check out his April 2009 NYT Magazine interview - http://www.nytimes.com/2009/05/03/magazine/03Obama-t.html?ref=magazine
He doesn’t affect the typical politician’s stance that economic theory is confoundingly complex and best left to the ‘experts’.
He understands the premises and consequences of Rubinomics, what the late Bob Fitch called the ‘grim hydraulics of trickle-down economics’.
Posted by: Watson | Apr 28 2011 5:07 utc | 6
The oft cited information age is here and oil does not have the predominant effect it used to. - Khalid
Well the information age, that is a complex topic, but it is true that oil production and consumption are roughly on a bumpy plateau, that is not increasing as many would want. (The big white hope is still Iraq.) “Unrest” in the ME makes the situation that much more uncertain, volatile.
My intuition is that Saudi is no longer a swing producer, in the sense of stepping up when needed, it isn’t really capable. Don’t forget its internal consumption rises day by day...
So India and China, and others, are compensating by using coal.
For ex:
Heinberg in the Energy Bulletin:
http://www.energybulletin.net/node/52684
Mearns on the Oil Drum:
http://europe.theoildrum.com/node/6700
One fossil fuel replacing another.
Nevertheless, economic growth will stagnate, reverse (more recessions), particularly in the Western World, the US first.
Posted by: Noirette | Apr 28 2011 18:09 utc | 7
I am afraid the implication of the 'information age' seems to not be clear to some. To put it plainly Microsoft, Google, Sony etc. are major producers of 'capital' but minor/negligible users of oil. That is the information age. So this growing part of the world economy is not dependent on oil and does not correlate with oil. That was my main point in saying that oil price is not driving the world economy.
As I also mentioned the world economy is increasingly decoupled from the US economy so our woes still effect the world but not as much. Europe is a more complex issue. It is still mostly a protected economic cabal with, yes, infighting but on the whole their lows are higher than ours because they do have some semblance of an industrial policy, not a free for all like us.
So the increase in oil prices will just accelerate our size shrinking wrt the ROW and may put some further economic pressures on us which may, hopefully, bring some sanity to the policy suggestions by the formerly fiscally 'conservative' Republican party that has been acting like extreme libertarians.
That's my 2 cents worth and I will look through the summer to see how things play out. Really like this website. On the whole pretty intelligent dialogue
Posted by: Khalid | Apr 28 2011 22:43 utc | 8
I am afraid the implication of the 'information age' seems to not be clear to some. To put it plainly Microsoft, Google, Sony etc. are major producers of 'capital' but minor/negligible users of oil. That is the information age. So this growing part of the world economy is not dependent on oil and does not correlate with oil. That was my main point in saying that oil price is not driving the world economy.The ‘information age’ is a serious consumer of electricity. Apple, Amazon, Microsoft, Google, FaceBook, Twitter, etc all run massive data centers. Not to mention the huge arrays of computers used by those corporations just for testing software. Those data centers require huge amounts of cooling. That is probably the biggest cost of Google's search business. And then there is the electricity needed to power up the network(s) needed to transfer the data from servers (data centers) to end users. So yes, the information age is sensitive to oil price.
Posted by: Philippe | Apr 28 2011 23:09 utc | 9
The value of the dollar has an inverse relationship with oil prices. So whenever the value of the dollar moves down, as is the case today, oil prices move up. And since the world is losing confidence in the dollar, commodities are usurping the dollar as a safe haven for investors. This also helps explain why oil prices are up.
The Fed putting it pedal to the metal, both in terms of quantitative easing and dropping interest rates, didn't alone cause oil prices to shoot up, but it did set this ball in motion. Ben Bernanke is the invisible man behind the eight ball in terms of rising oil prices. And he's probably also the invisible man behind the eight ball in terms of social arrest in the Middle East. When the cost of food eats up roughly 80% of your income, as is the case for most people living in the Middle East, and when food prices around the world have increased by roughly 30% over the past year or so, you too would be all fired up and ready to kick some dictator butt!
Posted by: Cynthia | Apr 29 2011 1:50 utc | 10
From the bears who explained Quantitative Easing, we now get a crash test dummy simplifying the Federal Reserve's current outlook on life, the universe and everything, courtesy of yesterday's press conference:
http://www.youtube.com/watch?v=T64Loi2FJT8&feature=player_embedded
Posted by: Cynthia | Apr 29 2011 10:18 utc | 11
The comments to this entry are closed.
History is often a good indicator of what the future might hold but not always. Nothing in history had anyone predicting there were going to be tidal waves of revolutions in the Middle East but, on hind sight, there were trends all in the same direction and growing and finally the dam broke. There are similar trends all in the same direction in the global economy.
There are two underlying assumptions in this analysis that should be re-evaluated. 1. Oil is still the main force driving of global manufacturing output. 2. The US economy dominates the world economy and as goes the US so will the world. Both these have been trending downwards. The oft cited information age is here and oil does not have the predominant effect it used to. Similarly every year the percent of world trade in which US is participating keeps falling. Unfortunately, oil price is also being driven by overconsumption here which confuses the issue. The use of SUVs starting in the 90s, with their 'loop hole' on gas mileage, has created an inflated demand that skews economic numbers.
I would suggest that the correlation in 2008 was a happenstance. The 2008 recession was mainly due to a very serious loss of confidence in the wake of the housing crisis and the, shall we say, almost criminal nature of the financial shenanigans that almost all financial institutions were either engaging in or susceptible to the fallout.
I would suggest the near future is more like the present, irrespective of oil prices. USA will remain in its current stagnant/anemic growth while many other parts of the world will continue to grow even with the higher oil prices.
Posted by: Khalid | Apr 27 2011 20:42 utc | 1