[entropy]

FWIW, I took an intermediate macroecomics class last spring. The text we used was Barro, pretty right-leaning, minimal gov't intervention views. The prof. was similar. The text did mention that most recent (last 40 years or so) recessions were associated with oil price spikes. The prof. also implied that without continuous growth, our current economic system would probably not be viable. I think one could use EROEI arguements to show that a reduced production curve would be the result of energy substitution; hence no continuous growth. Probably the main problem is convincing people that technology will not create cheap energy.

[Rincewind]

Dear fellow Peakers

As someone trained (but not indoctrinated) in economics I am always sensitive to those implicit assumptions that economists often throw into the discussion. There are two in the oil arena that I would like to discuss here.

1 " The fundamentals indicate that this is just a price spike" [and the price should be $30/bbl yadda yadda]

So my first question is What are these mysterious fundamentals?

2 "The economy is less dependent on energy since the last time [the last oil shocks]." Followed by some comment about the knowledge and service sectors make the difference.

However, given that the OECD estimates that around 50% of the global economy is directly or indirectly related to transport and mobility and transport is 90%+ oil dependent, just what is the rationale for this comment?

One confused Wizzard

Rincewind

[marek]

The statement that the economy is less dependent on oil is based on increased real output per dollar compared to the 1970s. However, that does not change the fact that the recent growth in GDP added a lot of surplus service industries, which will quickly disappear if consumer confidence drops post-peak. Besides, energy efficiency was achieved by moving production to distant countries. When transport costs rise, imports will become expensive, which will raise the price level and force the Federal Reserve to increase interest rates, thereby contracting the economy. So in the end the "less dependent" clause is false, at least for the U.S. For Europe, it is partly true, because increased efficiency was achieved as a result of less energy being used by domestic industry, rather by moving manufacturing abroad (of course this is a generalization).

Besides, statements like "it is a smaller portion of the economy" are usually naive. Nordhaus (an economist from Yale) said that the US economy would not be hurt by global warming, because agriculture only counts for something like 3% of the GDP. This, according to him, means that if crop yields were to decline by 50%, the GDP would fall by 1.5%. What a stupid analysis. So in Nordhaus's mind it does not matter what kind of flow the GDP represents, whether it is the value added by showing Scott Peterson on TV or whether it is producing food for the population.

I am an economist myself, but I am ashamed at how crazy many people in my profession are.

[chris-h]

$this->bbcode_second_pass_quote('Rincewind', '
')
So my first question is What are these mysterious fundamentals?

[tdrive]

$this->bbcode_second_pass_quote('', '1') " The fundamentals indicate that this is just a price spike" [and the price should be $30/bbl yadda yadda]

[Peak_Plus]

"Dependent" means how much in % of GDP is spent on energy/oil. If oil is cheap, this is little (1970s - 3%, 2000 - 1%). If the price of oil doubles or more again, many "dependencies" will have to be re-evaluated re-defined. Our economy is hardly dependent on food (16%?). My life, however, depends 100% on food. The question always remains in relationship to what...

[Concerned]

$this->bbcode_second_pass_quote('', '
')"Dependent" means how much in % of GDP is spent on energy/oil. If oil is cheap, this is little (1970s - 3%, 2000 - 1%). If the price of oil doubles or more again, many "dependencies" will have to be re-evaluated re-defined. Our economy is hardly dependent on food (16%?). My life, however, depends 100% on food. The question always remains in relationship to what...

[killJOY]

How many post hoc, ad hoc reasons have economists come up with for the latest price spike? Let me count the ways....
1.$this->bbcode_second_pass_quote('', ''')It's fear,' said Kyle Cooper, an analyst at Citigroup. 'It's not based on what is happening now. It's based on fear of what could happen.'

[ubercrap]

The world is in a state of confusion, diversion, and denial right now. I may never sleep well at night again...

[Eli]

I think that most of those guys are just market speculators. They are way to wrapped up in making money and watching which way the numbers are going for any deep thought. They can't see the forest for the trees.
They still won't understand what is up even when the price is at 100 dollars. There will be a profound confusion when the whole system breaks down. Nice post.

[arretium]

Great post! You should have added the one about a refinery outage causing the recent uptike in crude prices. Then you could add the following:
a) heavy crude refinery outage caused increase in prices
b) light sweet crude refinery outage caused increase in prices

[Free]

Yes nice collection indeed, good job! But what gets me even more is when they make predictions and give no reason what so ever! Just recently I read an article in a local newspaper about the high oil prices which quoted a so called expert saying that we could face 2 to 3 years of high prices followed by a release. No further explanation. They where obviously pleased with the answer. Sometimes I just want to bang their heads on the table so they wake up! Hello! Hello! Anybody at home?

[basketballjones]

They've probably stood next to the beast and felt it's breath on the back of their neck but written it down to the wind. That's how close they have come to fully understanding the reason why oil prices are where they are. I wonder what they'll be saying when they're staring at oil when it's $100/barrel.

To call the problem demand driven is to only look at half the problem. Markets consist of two halves, supply and demand. Demand is increasing at a steady rate, but less than the price is increasing. The difference being made up by the supply imbalance.

[seldom_seen]

$this->bbcode_second_pass_quote('killJOY', '7').$this->bbcode_second_pass_quote('', ' ')U.S. crude oil stockpiles have dropped three weeks in a row, raising concern suppliers are failing to match the needs of refiners ..."Prices are going to go up,'' said Anthony Nunan, manager of international petroleum business for Mitsubishi Corp.

[cube]

I think economics can be a respectable profession. Unfortunately it gets a bad name because "news" reports are usually nothing more then 1 minute sound bites. It's important to note that the people you see on TV are professional "entertainers" who's job is to deliver stories that generate sales. And not necessarily professionals in whatever industry they are supposedly representing.

[Raxozanne]

$this->bbcode_second_pass_quote('Free', '
')But what gets me even more is when they make predictions and give no reason what so ever! Just recently I read an article in a local newspaper about the high oil prices which quoted a so called expert saying that we could face 2 to 3 years of high prices followed by a release. No further explanation. They where obviously pleased with the answer.

[savethehumans]

$this->bbcode_second_pass_quote('', 'S')TEPHEN LONG: When the price of crude oil spiked above $US60 a barrel this week, investors got nervous. But it might not be too long before prices of this order are just a fond memory because the world is in the grip of a new China syndrome.

[killJOY]

$this->bbcode_second_pass_quote('cube', 'I') think economics can be a respectable profession.

[wilburke]

$this->bbcode_second_pass_quote('', '7').KillJoy wrote:U.S. crude oil stockpiles have dropped three weeks in a row, raising concern suppliers are failing to match the needs of refiners ..."Prices are going to go up,'' said Anthony Nunan, manager of international petroleum business for Mitsubishi Corp. link
8.Quote:Opec, the cartel of oil producing countries, says it is pumping at capacity and the problem lies with refineries that cannot pump out enough petrol or diesel to cope with rising demand. link

[aahala]

$this->bbcode_second_pass_quote('cube', 'I')t's important to note that the people you see on TV are professional "entertainers" who's job is to deliver stories that generate sales. And not necessarily professionals in whatever industry they are supposedly representing.