In this guest post, economist Paul Segal argues that the now popular view that oil price spikes lead to recessions is largely unfounded.
Do high oil prices cause recessions? The US economist James Hamilton is famous for his 1983 finding that oil price spikes had preceded all but one post-war US recessions. Hamilton recently claimed that the current recession can be fully accounted for by the high oil prices of 2007-08. But while oil prices are certainly an important macroeconomic variable, it is just not plausible that they have anything like the impact that Hamilton suggests.
Oil prices have a direct impact on output only to the extent that they lead to lower consumption of oil. In a standard competitive model of the economy, the decline in output is equal to the share of oil in GDP times the decline in consumption of oil. From a peak of 7.6bn barrels in 2005, US oil consumption declined by 6 per cent to 7.1bn in 2008. With oil consumption comprising 5 per cent of GDP in 2008, this can account for a decline of only 0.3 percent of GDP – which, alone, is not nearly enough to cause a recession. The largest decline in oil usage that has ever occurred in the US was over 1979-80, for which the same calculation implies a decline in GDP of 0.6 percentage points – again, not nearly enough, on its own, to explain the US recession of 1980.
A cottage industry has developed around the effort to find microeconomic mechanisms such as market frictions that could explain a larger role for oil than this standard model implies. Oil has a romantic place in the US imagination and some US economists cannot quite believe that it is just another commodity. But my own view is that these mechanisms can explain only a small additional impact for the oil price.
Today marks another step towards the phasing out of conventional light bulbs in the European Union. From now on, traditional clear bulbs of 100W and all traditional frosted bulbs cannot be manufactured or imported into the EU.
In the UK at least there has been somewhat predictable outrage at this infringement on the basic human right to use inefficient lighting devices. The Daily Telegraph notes that it has been “inundated” with letters of complaint. Even the Guardian’s Comment is Free has run a contrarian piece from a hoarder of the endangered lights:
Last Wednesday, in an act of unprecedented extravagance, I visited a hardware shop where I furtively spent the entire contents of my wallet – about 30 quid – on incandescent lightbulbs. The shopkeeper had a special offer (three for a pound), so I came home with an awful lot of booty. Naughty, yes. Satisfying? No. Lately, I find that incandescent bulbs are like pork scratchings, or really good cherries, by which I mean that too many is never enough.
We also received a bizarre press release today about an enterprising business operator stockpiling the bulbs until 2012, and predicting that they would fetch £40 – £60 by then.
On FT Energy Source:
The Google-hurricane connection
Markets: Crude recovers from sell-off
PetroChina goes long on oil sands
Brazil: How to lose $7bn in a day
Opec: Reading the tea leaves
Environmental protestors take on the City of London, creating a sticky situation for RBS… (FT Alphaville)
How Britain survived rolling blackouts in the 1970s (The Telegraph)
Texas oil jobs are still falling (Houston Chronicle)
The Prius and peak rare earth metals (Autoblog)
The Kern County oil flop (Energy and Capital)
Millions in Nepal facing hunger as climate changes (Cop15)
The challenge of selling diesel to US drivers (LA Times)
New solar cell efficiency record set (Scientific American)
$1m prize for efficient, low-pollution $5 cook stove (Denver Post)
David Mackay on the future of energy (NY Times)
Pondering the risk of ‘trigger points’ as CO2 concentration increases (Christian Science Monitor)
Daniel Yergin debunks peak oil and Chris Nelder debunks peak oil debunkers (WSJ, Getreallist)
Morgan Downey has found a nice correlation between Google searches on the term ‘hurricane’ and actual hurricanes. He’s made this chart:
Whether it’s predictive or not is yet to be seen: as the National Oceanic and Atmospheric Administration points out, the last few years have skewed towards seeing storms earlier in the season – June and July – whereas typically August to October are the worst months. Last year there were four storms by the end of July, and in 2005 – the year of Katrina – there were seven by that date. This year, Mexico is certainly not out of the woods.
On the predictability of search trends (Official Google Research Blog, 17/08/09)
Speculators driving up prices? Use the SPR! (FT Energy Source, 28/08/09)
Crude oil prices recovered from Monday’s sell off, trading in New York and London above $70 a barrel.
Nymex October West Texas Intermediate rose 37 cents to $70.33 a barrel while ICE October Brent jumped 64 cents to $70.29 a barrel. “Despite the sell-off, WTI’s trading range remains intact,” said Edward Meir, of brokerage MF Global.
The market will focus this week on Opec’s meeting on September 9 in Vienna, although most market participants believe the oil cartel will keep its production levels unchanged. Saudi Arabia, the group’s de facto leader, has signalled in the past that it wants oil prices to hover around $70-$80 a barrel.
Read the full commodities report
What price oil sands? We wrote in June about renewed interest in oil sands projects, as investment prices fell just as oil prices were rising. Not long after, Greenpeace released a paper arguing the high price of extracting oil from tar sands could make such projects uneconomic in the long-term.
But PetroChina, for one, believes that oil sands are a good deal, having agreed to pay C$1.9bn (US$1.7bn) for 60 per cent of two oil sands projects in Northern Alberta. The deal reportedly came after years of watching the market.
By Gwen Robinson
In many situations, handing a single company a dominant role in a vast and promising new oil project might do wonders for its share price.
But in the case of Brazil’s Petrobras – the world’s fourth-largest oil producer – ambitious plans unveiled on Monday by President Luiz Inacio Lula da Silva for development of the country’s offshore oil fields essentially “stripped Petroleo Brasileiro SA investors of $7bn in a day, the biggest drop in six months”, Bloomberg reported.
Indeed, the combined market cap of Petrobras preferred and common shares plunged a cool 13.3bn reais ($7bn) to 306.5bn reais (between 3.6 and 4.5 per cent) on Monday, from 319.8bn reais on August 28.
Opec’s next meeting takes place next Wednesday in Vienna (and a decision will come late, because of Ramadan).
Trying to predict an Opec decision based on comments from member countries in the lead-up is notoriously difficult. But for those who like guessing, Reuters has a handy list of what’s been said to their reporters in the last couple of weeks:
Bulging global oil inventories remain a major concern for OPEC member states, even as signs of a possible global economic recovery grow, and will probably be be a topic at the meeting, Iran’s OPEC governor said.
“Everyone is worried about the current stock levels… for both OECD countries and floating storage,” Mohammad Ali Khatibi told Reuters in a telephone interview. “It may be considered by ministers a policy within one year, maybe a lower or higher period, to bring stock levels back down to normal.”
PetroChina in $1.7bn Canadian project stake
Chinese giant will acquire a 60% stake in the oil sands projects (FT)
Norwegian state fund in $4bn green push
SWF to invest in environmentally responsible companies (FT)
China Shenhua plans $40bn investment until 2013
About 30-50% of the investment will be used for capital spending (Reuters)
US natural gas store may near capacity
Natural gas storage capacity rose by a modest 100bn cubic feet this year (FT)
Baker Hughes buying BJ Services for $5.5bn
Deal to would create an industry giant (Market Watch)
Big oil independents see contrasting fortunes
Fates of UK companies were brought into stark relief last week (FT)
Lula sets rules on exploiting oil reserves
A bid to grab a bigger share of the profits and fund development plans (FT)
Chevron steps up Ecuador legal fight
Long-running legal battle over pollution allegations (FT)