[Duende]

Anyone read the cover story of the latest Economist?
http://www.economist.com/node/18281774? ... N=64916986

Evidently, according to both the IMF and Goldman Sachs, a 10% rise in oil prices equals a .2% reduction in GDP.

So, here goes some back-of-envelope calculations:

Expected world GDP growth/yr. = 4.6%
Current Brent crude price = $116

$128 -.2%
$140 -.4%
$154 -.6%
$169 -.8%
$186 -1%
$205 -1.2%
$225 -1.4%
$247 -1.6%
$271 -1.8%
$298 -2%
$328 -2.2%
$360 -2.4%
$396 -2.6%
$436 -2.8%
$479 -3%
$526 -3.2%
$578 -3.4%
$632 -3.6%
$695 -3.8%
$765 -4%
$841 -4.2%
$925 -4.4%
$1013 -4.6%

Therefore to stop growth completely, am I to believe the price of oil would have to rise over $1,000/barrel??! That sounds nutty. I can't imagine that the relationship is only 10%/-.2... it's gotta be higher than that!

[Outcast_Searcher]

I agree that growth would stop MUCH quicker than that, at least in the near to moderate term. My best guess as to the issue here is:

The folks on CNBC have been citing about a $10.00 increase per -.2% GDP impact. That sounds more like it to me -- you'd get a much more rapid and consistent effect as prices escalate, at least for the prices we can imagine in the near to moderate term. So if we get $300 oil, that would pretty much stop all economic growth in the current environment (20 * .2% is 4%). Notice that around $100 (WTI) that 10% and $10 happen to be the same thing, so as illiterate and especially mathematically illiterate as MUCH of the public and reporters are -- I could easily see this being incorrectly reported.

I also suspect it is nonlinear. There are certainly psychological bumps at round numbers -- at least in the short term. $4.00 in the U.S. seemed to be such a number in 2008.

This prediction DOES seem FAR more realistic to me however, than the doomer predictions that when prices go to "X" (like $5.00 or $8.00) in the U.S., all hell suddenly breaks loose. This seems like doomer fantasy more than a realistic economic model (or guess). After all, Europeans have been living with $10.00ish gasoline for quite a while now.

The other thing is, most of economics is just ivory tower theories. It is not easy to model real world effects, and observing them in the "messy" real world where there are literally thousands of variables and notoriously irrational human beings mucking about -- simple mathemetical models most of economic predictions are based on are a very basic and assumption-riddled "educated guess", at best.

IMO, that is why it is (justifiably) called the "dismal science". The classic econ joke that illustrates this is: "If you laid 10,000 economists end-to-end, they could not reach a conclusion."

[americandream]

$this->bbcode_second_pass_quote('Duende', 'A')nyone read the cover story of the latest Economist?
http://www.economist.com/node/18281774? ... N=64916986

Evidently, according to both the IMF and Goldman Sachs, a 10% rise in oil prices equals a .2% reduction in GDP.

So, here goes some back-of-envelope calculations:

Expected world GDP growth/yr. = 4.6%
Current Brent crude price = $116

$128 -.2%
$140 -.4%
$154 -.6%
$169 -.8%
$186 -1%
$205 -1.2%
$225 -1.4%
$247 -1.6%
$271 -1.8%
$298 -2%
$328 -2.2%
$360 -2.4%
$396 -2.6%
$436 -2.8%
$479 -3%
$526 -3.2%
$578 -3.4%
$632 -3.6%
$695 -3.8%
$765 -4%
$841 -4.2%
$925 -4.4%
$1013 -4.6%

Therefore to stop growth completely, am I to believe the price of oil would have to rise over $1,000/barrel??! That sounds nutty. I can't imagine that the relationship is only 10%/-.2... it's gotta be higher than that!

[vtsnowedin]

From the article.
$this->bbcode_second_pass_quote('', 'D')earer oil still implies a transfer from oil consumers to oil producers, and since the latter tend to save more it spells a drop in global demand. A rule of thumb is that a 10% increase in the price of oil will cut a quarter of a percentage point off global growth. With the world economy currently growing at 4.5%, that suggests the oil price would need to leap, probably above its 2008 peak of almost $150 a barrel, to fell the recovery. But even a smaller increase would sap growth and raise inflation.

[Pops]

$this->bbcode_second_pass_quote('Outcast_Searcher', 'T')he other thing is, most of economics is just ivory tower theories. It is not easy to model real world effects, and observing them in the "messy" real world where there are literally thousands of variables and notoriously irrational human beings mucking about -- simple mathemetical models most of economic predictions are based on are a very basic and assumption-riddled "educated guess", at best.

[AirlinePilot]

$this->bbcode_second_pass_quote('Outcast_Searcher', 'T')his prediction DOES seem FAR more realistic to me however, than the doomer predictions that when prices go to "X" (like $5.00 or $8.00) in the U.S., all hell suddenly breaks loose. This seems like doomer fantasy more than a realistic economic model (or guess). After all, Europeans have been living with $10.00ish gasoline for quite a while now.

[americandream]

$this->bbcode_second_pass_quote('Pops', '')$this->bbcode_second_pass_quote('Outcast_Searcher', 'T')he other thing is, most of economics is just ivory tower theories. It is not easy to model real world effects, and observing them in the "messy" real world where there are literally thousands of variables and notoriously irrational human beings mucking about -- simple mathemetical models most of economic predictions are based on are a very basic and assumption-riddled "educated guess", at best.

[Outcast_Searcher]

$this->bbcode_second_pass_quote('AirlinePilot', '')$this->bbcode_second_pass_quote('Outcast_Searcher', 'T')his prediction DOES seem FAR more realistic to me however, than the doomer predictions that when prices go to "X" (like $5.00 or $8.00) in the U.S., all hell suddenly breaks loose. This seems like doomer fantasy more than a realistic economic model (or guess). After all, Europeans have been living with $10.00ish gasoline for quite a while now.

[vtsnowedin]

It is not just a choice between rural and city in the USA. Over half of Americans live in the suburbs and forty percent have no access to public transportation and only 4% use it to commute to work. The city has the jobs and transportation and people living in rural areas have jobs working the land or at least land enough to grow their own food and fuel. The suburbanite has none of this, just a house a driveway and a scrap of lawn. He must commute to work as exclusive zoning has insured that every job is driving distance away. The average car commuter in the US drives alone and spends 100 minutes a day round trip.
The cities can put on more trains and buses and the farmer can walk to the barn but if gas gets to $10.00 a gallon the suburbanite is in real trouble and the local government that depends on his income to pay property taxes will bounce down the cliff with him.

[nocar]

I guess I am not sure what people mean by 'implode the whole economy'. There are lots of places around the world where most people can not afford to drive their own cars and public transport is poor. They are called 'developing' countries, and here people find solutions to travel demands. When I visited Chile, in the 1990s (a country that is on the verge of becoming a developed country) in the provincial city La Serena, there were a kind of mix between taxis and buses: Informal collective taxis driving set routes on the major routes. People know about them, and you placed yourself on the route and signaled, so the next taxi picked you up, if it was not already full of course. The waiting time could vary, because there were no timetables, but usually you could get a ride within 15 minutes or so. There were more official buses too, with infrequent timetables.

Today with cell phones and computers I am sure it possible to create nifty versions of collective taxis. In developing countries the most expensive part of driving your own vehicle is the purchase of the vehicle itself. In the USA, with increased gas prices, there will be no lack of vehicles. People will find ways to survive - like, if many people find it too expensive to drive to the grocery store, neighbors will pool resources to send one vehicle there and load it to the top. Or someone will set up an informal grocery store in their own home within neighborhood walking distance. More expensive per item than the big supermarkets of course, but available without driving.

Perhaps those kinds of solutions are what is meant by 'implosion of the economy'. I would call it creating a different kind of economy. Certainly it is a lot more benign situation than a physical destruction of a society in wars or like last year's Haitian earthquake -- situations that kill and traumatise people as well as destroy buildings and infrastructure.

[eXpat]

4 dollars away...
Oil at $110 May Trigger Pain U.S. CEOs Weathered at $100
$this->bbcode_second_pass_quote('', 'A') recovering economy helped U.S. chief executive officers weather crude’s surge past the $100 mark. At $110 a barrel, the pain would start to kick in.

As oil traded at 29-month highs last week on concern that violence in Libya would further crimp Middle Eastern supplies, CEOs said they were waiting to see how much the price rises, and for how long.

“Any time something like oil goes up dramatically overnight, it becomes very hard to adequately plan,” said Samuel Allen, 57, chairman and CEO of Deere & Co. (DE), the world’s largest maker of agricultural equipment. “It has caused us to be more careful or cautious in watching the outlook, but we have still moved forward with all our plans.”

Corporate assumptions would have to start changing when oil reaches $110 a barrel, according to economists such as Chris Low of FTN Financial in New York. Crude at that price would offset the benefit from the tax cut approved by Congress in December, and begin to slow economic growth, Low said.

“As long as consumers are willing to pay up a little more, there really isn’t going to be a significant impact,” Low said in an interview. “But we’re pretty quickly running out of time there with oil through $100 a barrel. We’re getting to levels where we have to think about taking our forecasts lower.”

[Keith_McClary]

Spiking Oil, Plunging Economy
$this->bbcode_second_pass_quote('', 'a')ccording to an unscientific USAWatchdog.com poll of nearly 1,000 readers, more than 60% think gas prices will be $5.00 or more a gallon by this time next year.

[JohnRM]

The problem with these charts is that at about $125-140 a barrel for oil, the airlines can no longer make a profit. The prices have to start rising exponentially. People cut back dramatically on consumer spending to pad their financial position. Food prices have to begin to rise, because logistics companies have to start paying drivers more per mile. Auto-makers begin to suffer due to declining auto sales and shifts into more fuel efficient models which have a dramatically smaller profit-margin than the big gas-guzzlers.

So, maybe we lose two-tenths of a percent of GDP per ten percent increase in a barrel of oil up to a point, but somewhere around $125-$140 a barrel, a great number of things occur that will unravel a number of industries in America, and the world. Immense pressure will be put on an already fragile world economy and there is real doubt in my mind that it can take it.