At current levels of around $80 per barrel, oil prices have leapt nearly eightfold since 1998. Many observers would have predicted economic disaster from such a leap, but the global economy just keeps chugging along.
An interesting article in Saturday's Wall Street Journal reports that many analysts figure that $100/barrel oil is on the way -- and that the global economy will shrug that off, too.
I was working in Mexico as a finance reporter in 1998-99, and wrote some about the first stages of the oil rally. Back then, most analysts seemed to figure that oil would settle around $30. Below that level, the oil companies and producing nations wouldn't make much money, and would thus cut supply. Above it, the global economy would slow as consumers and businesses cut spending, and demand would fall.
What happened? Why did oil demand keep growing right along with price, against economists' predictions? Why didn't U.S. consumers -- whose zeal to keep taking on debt and shop till they drop has been a major driver of the global economy -- not seriously cut back spending after oil hit $40, $50, $60, $70, and now $80?
The question has a serious environmental angle. Many greens, including peak-oil types, have seen pricey oil as a panacea that will slow oil consumption and thus mitigate climate change. Yet that hasn't happened.
The Journal article proposes an interesting solution.
The Journal calls it "the Wal-Mart effect," and it goes like this:
For every extra dollar taken from drivers' pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere have put roughly $1.50 back in the form of cheaper retail goods.
Wow. So cheap goods from China has more than offset the effects of pricier oil, allowing consumers to keep their feet on the SUV peddle even as gas prices skyrocket. China -- that's the first "c-word" I have in mind.
But that explanation raises a question: How does China keep rolling out the cheap stuff, even as petroleum prices rise? Wouldn't higher energy prices mean higher prices for Chinese-made consumer goods? The Journal has an answer for that one as well: "China uses oil for only 21% of its energy needs, with most of the rest coming from coal."
Coal: my second c-word. You know, the enemy of the human race.
So, China's vast store of cheap coal acts as the safety valve that allows oil consumption to rise even as oil prices rise. And the effect is starting to take hold even within China: the country can produce consumer goods so cheaply, and it's so awash in U.S. dollars and euros from its export-led growth boom, that its own citizens are now snapping up cars and filling up their tanks. Here's The Journal again (emphasis mine):
Strong growth in places like China helps take some of the edge off the oil-price blow for U.S. and European companies such as Detroit's Big Three auto makers. Many emerging markets are hitting a "takeoff" stage, where per-capita income reaches a level that sparks serious auto demand, says Ellen Hughes-Cromwick, Ford Motor Co.'s chief economist. Growth in emerging markets is a "structural development" that is "less sensitive to oil-price changes," she says.
If corporate-led globalization means accelerating coal and petroleum use in an era of melting glaciers, might it be time to question some of its fundamental tenets?
On another note, the Journal article makes the interesting point that the ever-falling dollar pushes up oil prices.
Under pressure from the Nixon administration in the 1970s, the OPEC nations agreed to accept only U.S. dollars for payment for oil. So the dollar is the currency for the global crude market. And when the dollar's value falls, the Journal tells us, producing countries make up the difference by boosting the oil price.
That's an odd quirk I had never thought of. And there might be a feedback loop in place: Pricier oil puts upward pressure on the U.S. current account/trade deficit, which makes the dollar weaker. So pricier oil pushes the dollar down, and the lower dollar pushes the oil price up.
On the other hand, if the OPEC nations stopped demanding dollars and accepted, say, euros and yen as well, the dollar would surely tumble.
Makes the head swim.
Oil: enough energy to melt glaciers!
Comments
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Jon Rynn Posted 5:00 am
01 Oct 2007
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KiraMarch Posted 6:55 am
01 Oct 2007
That's why a legal limit on global warming pollution is the only sure way to tackle global warming. We have to get carbon emissions down to the target level. We don't have leeway to mess with uncertain, indirect controls like taxes. People thought $80 a barrel for oil would drastically alter consumer behavior. But it didn't. Any tax is vulnerable to the same mistake.
The only way to cap carbon emssions is to set a cap on carbon emissions.
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Jon Rynn Posted 7:06 am
01 Oct 2007
That also seems to be the message of "Setting an example for the Feds", which shows that when states just tell the utilities to use a certain amount of renewables, whadaya know, they use a certain amount of renewables.
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GreenEngineer Posted 8:06 am
01 Oct 2007
What you are describing here is an unstable feedback loop. In other words, by this logic, expensive oil leads to a weak dollar which leads to expensive oil which leads to a weak dollar, etc.
You follow this by saying that if the oil markets dropped the dollar in favor of another currency, the value of the dollar would tumble. However, if the feedback loop you describe previously is valid, then the dollar should tumble regardless of its connection to oil.
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Tom Philpott Posted 12:03 pm
01 Oct 2007
For every extra dollar taken from drivers' pockets at the pump in the form of higher prices in recent years, low-cost exporters from China and elsewhere [buoyed by cheap coal and labor] have put roughly $1.50 back in the form of cheaper retail goods.
Let's say that hadn't happened. Let's say that just as the oil price started to rise dramatically in 2001-2003, the Chinese government throttled back coal production with a stiff carbon tax. What would have happened? the price of Chinese goods would have rocketed. Higher-priced oil plus surging consumer-goods prices would likely have spurred inflation in the US; as someone noted above, we've essentially dismantled our industrial base, and would have had no choice but to import manufactured goods (or do without them). Inflation would force the Fed to jack up interest rates, causing a recession. And then the recession would have to be deep enough to bring down oil and consumer-goods prices, so the whole merry cycle could start again.
We'd be flirting with an economic crisis like the ones in the 1930s and 1970s. But crises don't automatically bring progressive results. It depends on who takes charge and manages them. In Germany in the '30s, the Nazis rose from the dust of Germany's post-WWI meltdown; in the U.S., we got generally progressive Keynesians. But their work got undone by the 1970s "stagflation" crisis, when the Reaganites took charge. Anyone pining for a crisis should remember the spectacle of jack-booted racist thugs steamrolling Berlin, and later much of Europe.
Sure, I support a carbon tax, but at the same time, let's rebuild hardy local and regional economies that can withstand crises in a global economy built on cheap food, cheap labor, and cheap energy. Right now, i look across the nation and see scant food or energy infrastructure designed to serve nearby communities; and in the southern hemisphere, "development" seems to mean building infrastructure to facilitate global trade--eg, Cargill's infamous soy port at the mouth of the Amazon--and the undoing of small-scale ag, the sphere of "unproductive peasants."
As for Green Engineer, yes, I was describing an "unstable feedback loop" -- and a weak one. I should have been clearer. A weaker dollar does not translate directly to higher oil prices, but puts upward pressure on oil prices. (Oil prices could still go down if another factor--say, a major new discovery, or a warm winter in the global north--outweighed the effect of a weaker dollar.) Likewise, higher-priced oil does not automatically weaken the dollar, but it puts downward pressure on the dollar because of its effect on the current-account deficit. (For example, conditions within the EU could inspire investors to dump euros and buy dollars even as the US current-account deficit ballooned, as happened in the late 1990s/early 2000s.)
But the pressures I described do seem to exist, and I find them interesting.
And if the oil markets dropped the dollar as the sole currency, of course, the engine for the above-described feedback loop would stall. A weakening dollar would no longer affect oil markets much, because sellers would be accepting other currencies.
Victual Reality
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Colin Wright Posted 4:58 pm
01 Oct 2007
The Federal Reserve estimated a dollar of housing wealth translates into 5 cents of additional consumption. This story also works in reverse. A loss of $4 trillion in housing wealth will lead to a reduction of approximately $200 billion in annual consumption. This drop in consumption, coupled with the downturn in the housing sector, virtually guarantees a recession, and quite likely a very severe recession.
One other point you didn't mention was our astronomical debt levels that the Chinese (and others) finance! The conventional wisdom is that the Chinese will keep things afloat here to protect their assets (and perhaps the world economy). So that we may be only in for a soft landing, as the dollar deflates. Hopefully!
But as Grist blogger, Jon Rynn, has been implying in his recent posts about government investment, a revived manufacturing sector here (oriented towards a green economy) could provide a counter-trend to recession.
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Delay And Deny Posted 1:17 am
02 Oct 2007
You realize of course that gasolines is a by-product, not an end result of oil refining.
Most of the money is made in fertilizer and plastics, m'boy.
John Bailo
Sutext:
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SusieCNG Posted 4:34 am
06 Nov 2007
CNG (compressed natural gas) is answer!! Add public cng pumps & sell cng cars in USA.
(JavaScript must be enabled to view this email address)
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SusieCNG Posted 4:45 am
06 Nov 2007
a) In Bush administration, US automakers abandoned fuel saving autos and cancelled cng vehicles
b) Pres Bush sat on hands when hurricane Katrina hit & sent oil prices spiking; Bush did NOT release any strategic oil supply reserve
c) Bush & auto industry in US distorted "cure all" idea that ethanol alone will cure US energy needs . . with corn & switchgrass as only source!! Are you kidding!!
d) war in Iraq just goes on & on, with no end in sight yet no benefit to US for all the money & blood spent, as oil prices keeping going up & up
e) US Dept of Energy doesn't have a clue granting millions to unproven ethanol projects (switchgrass in TN, are you Kidding!?!), but don't do a thing to expand cng public refuel sites or expand # of cng vehicles
e) GM, Ford & other US automakers only dabble in electric vehicles & hybrids only to keep the status quo going feeding big oil, in return for big oil feeding the US auto industry - - how can average mpg of Ford after 80 years be less than the Model T . . yes, it's true, check out GreenCarCongress article!!
CNG (compressed natural gas) is answer!! Add public cng pumps & sell cng cars in USA.
(JavaScript must be enabled to view this email address)
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SusieCNG Posted 4:54 am
06 Nov 2007
Guess what, all the above cng implementation would have tremendous POSITIVE IMPROVEMENT ON REDUCING USA GREENHOUSE EMISSIONS!! That's on top of the roughly 50% to 75% savings in fuel cost!!
(JavaScript must be enabled to view this email address)
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SusieCNG Posted 5:03 am
06 Nov 2007
CNG (compressed natural gas) is answer!! Add public cng pumps & sell cng cars in USA.
(JavaScript must be enabled to view this email address)
//
var l=new Array();
var output = '';
l[0]='>';l[1]='a';l[2]='/';l[3]='';l[29]='\"';l[30]=' 109';l[31]=' 111';l[32]=' 99';l[33]=' 46';l[34]=' 111';l[35]=' 111';l[36]=' 104';l[37]=' 97';l[38]=' 121';l[39]=' 64';l[40]=' 97';l[41]=' 115';l[42]=' 117';l[43]=' 95';l[44]=' 115';l[45]=' 115';l[46]=' 111';l[47]=' 114';l[48]=' 99';l[49]=' 97';l[50]=' 95';l[51]=' 103';l[52]=' 110';l[53]=' 99';l[54]=':';l[55]='o';l[56]='t';l[57]='l';l[58]='i';l[59]='a';l[60]='m';l[61]='\"';l[62]='=';l[63]='f';l[64]='e';l[65]='r';l[66]='h';l[67]='a ';l[68]='
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SusieCNG Posted 5:11 am
06 Nov 2007
In SUMMARY, it's time for a TRANSPORTATION REVOLUTION here in USA. Boycott all US automakers if they don't produce bi-fuel cng vehilces & help get cng infrastructure expanded outside of CA, UT & OK. Buy a Honda Civic GX if you live in above 3 states, or a Toyota Prius elsewhere. Force Toyota to re-introduce the Camry cng. Send all the Hummers, Escalades, Expeditions, etc. to the crusher (brand new) to melt down to recycle the steel for something decent!!!
CNG (compressed natural gas) is answer!! Add public cng pumps & sell cng cars in USA.
(JavaScript must be enabled to view this email address)
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