Rising Oil Prices Threaten Recovery
Pat Garofalo rounds up some of the latest data points suggesting that rising oil prices are a major threat to economic recovery. People are constrained in their short-term ability to reduce gasoline consumption when faced with higher prices. Thus, a price spike reveals itself partially in short-term reductions in gas consumption, but largely in short-term reductions in other kinds of consumption. And that can hammer the economy.
This problem of the short-term probably only has a good solution in the long-term. If we want to get out of the trap of oil price shocks, we need to transform our economy and transportation system to less reliance on cheap oil. But there are also things we can do in the short term. The mass transit operating expensive provision added to the war supplemental is good, and congress could do more in this regard.
11 Responses to “Rising Oil Prices Threaten Recovery”
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June 13th, 2009 at 2:49 pm
The really disgusting thing about this is Obama’s role.
Speculation in oil futures is causing this; oil demand is down and loaded tankers are floating around with nowhere to go.
The CFTC could stop the speculation by issuing “action letters” and imposing position limits on speculators. Unfortunately, Obama just appointed an ex Goldman-Sachs (the prime mover behind the speculation) guy to head the CFTC.
June 13th, 2009 at 2:52 pm
let’s start with the miami-tampa high-speed rail link. We will reduce our dependence on foreign oil, help our economy and begin to heal the planet with a link between northwest miami and northeast tampa. see
June 13th, 2009 at 3:05 pm
What truth is there to the rumor that the oil-producing countries through their investment funds that are the prime movers in the oil futures speculation?
Are there any means of determining this one way or the other?
June 13th, 2009 at 3:12 pm
Pricing the externalities of oil and smoothing out the spikes run at cross purposes to some extent. Not having to fear spikes in energy costs will cause energy consumption to increase compared to passing those risks onto consumers. I only say this because a lot of people think a countercyclical energy tax would be a good policy that can’t be enacted in practice, but I think a constant tax on oil might actually be better policy.
June 13th, 2009 at 3:28 pm
In congressional hearings last year, it was established that Goldman-Sachs, Morgan, Stanley inter alia established the Intercontinental Commodities Exchange in Atlanta, with trading platforms in Chicago.
The CFTC agreed, in an action letter, that the exchange would be regulated by the UK’s FSA (a toothless wonder) instead of the CFTC, even though the oil is WTI crude and the delivery point is in Oklahoma.
The result was that commodity index funds run by GS and MS, with Harvard endowment and CALPERS as major customers, increased money in the futures market from ~6 to ~60 billion dollars. The price went from ~$30/barrel to ~$147.
The hearings, plus floor speeches by Sens. Dorgan and Cantwell appeared to cool the market. And then the financial panic arrived.
Apparently the speculators don’t fear action from the Obama administration.
Google CFTC hearings, Greenberger, ICE for more.
June 13th, 2009 at 3:32 pm
High oil prices are fantastic for elites the world over and for financial markets. Good for financial markets because oil revenues especially in the Middle East, especially the Saudis, flow directly to the elites who use the dollars to buy financial assets. Thus taking money out of the hands or people who would never buy a stock or a credit swap and putting it into the hands of those that will.
The US stock market rally is currently inseparable from the rally in oil prices. If your thinking high gasoline prices are bad for the economy and thus bad for stocks you are making a fundamental mistake. The economy has nothing to do with the stock market. Historically they move together with leads or lags based upon the same thing. Increases and decreases in systematic liquidity. ie. increasing or decreasing money and available credit. If money flows directly into the markets and not the real transaction economy, the so called real economy, then prices of financial assets will rise. Over ten trillion dollars has been put or promised into the financial economy the US government alone and stocks and financial asset prices are now rising. No need to filter it through factories and offices for wages and rents to pass through to the owners who then buy the assets. That is still good but not crucial. Oil is so beautiful because it requires so little filtering through workers and wages and all those real things.
There is actually no theoretical limit to how high asset prices can rise in relation to the real transaction economy. The only real limits are political and social.
June 13th, 2009 at 3:37 pm
Yes, we do have a glut of oil right now. So why the high price? Chatter around the financial blogs points to substituting oil for gold as an inflation hedge. OTOH people are nearly giving away natural gas and still nobody talks about nuclear. Tsk.
Gasoline is being squeezed by low production, and BigY still thinks more buses is the ultimate solution. As for the idiot thinking about high speed rail between one set of house poor elderly and another, through the Everglades, I can think of no bigger waste of money.
Lastly, speculators perform an important function in the economy. Pricing has decoupled from supply and demand. If you don’t like it, you can blame Obama for spending trillions he doesn’t have.
June 13th, 2009 at 6:48 pm
Lastly, speculators perform an important function in the economy. Pricing has decoupled from supply and demand. If you don’t like it, you can blame Obama for spending trillions he doesn’t have.
Or you can blame the color of Marie of Roumania’s bidet.
June 13th, 2009 at 6:58 pm
Driving miles decreased from January 2008 to March 2009. April data isn’t out yet. Federal gas tax revenue is down, down, down.
Demand for gas cratered while oil soared over $140 a barrel. It cratered more after the financial implosion.
Oil and gas behave like they did last summer, driven by speculation and dollar weakness, not market fundamentals. So what did Congress or the President do about shadowy energy futures trading? Nothing.
If you want to see how Goldman is favored, go to:
http://zerohedge.blogspot.com/2009/06/just-how-many-regulations-is-goldman.html
June 14th, 2009 at 12:22 am
Not only do we need less energy-intensive transportation, we need a less transportation economy. That means radically shortened logistic chains, with relocalized manufacturing on the Emilia-Romagna model.
It also means less total production and fewer hours of labor, by producing stuff with modular design for ease of repair and recycling, instead of producing stuff for the landfill (after a brief detour through our living rooms). And of course, this will mean much of Sloanist mass-production industry’s plant and equipment will go to rust in a sane economy, even with an improved material standard of living.
June 14th, 2009 at 11:48 am
I do not know why it is so often assumed that a run-up in oil prices is the result of market manipulation. More likely it reflects a belief that oil reserves are running out — encouraged by the run-up last summer. If oil is on the way to becoming a scarce resource, and you want to make some money, then why not buy a lot of oil and just sit on it?
The solution to this problem, I think, is in addition to making alternative energy sources less expensive, don’t do anything that would increase the cost of coal, gas, or oil for now.