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Oil shock is a real shock and bigger than a bread box
Let’s start with the shocking comparison.
In the first oil shock (1973 & 1979) prices were set by an oil cartel called OPEC. OPEC set prices that its members more or less adhered to. At first, when prices changed there was virtual certainty that that was the new price. That part is different from the way the oil market works today. OPEC 'matters' but is no longer its sole master. Market forces themselves produce prices and prices fluctuate. Even so what OPEC did in ratcheting prices up in teh 1970s in what then became a severe recession and an open-door policy for inflation is still LESS than the price episode we are currently in the middle of. Yes, in some way this prices shock is larger.
In the early 1970s the real oil prices went from about 7.9 dollars per barrel to a peak of 48.4 dollars per barrel. For these statistics I look at WTI prices for oil scaled by the non-energy CPI. In this episode the real oil price has gone from a low of $7.7/barrel in 1998 to a high of $56.91/barrel. Thus real oil prices rose by 6.1 times in the 1970s over two separate price resets but have risen by more in this cycle, rising by 7.7 times, and peaking in 2008. The 1970s spike took about seven years while in this cycle the swing from low to high took about eight years. In this cycle about four years after the peak the price is lower by 30%. Four years after the peak in the late 1970s the real prices was lower by 40%.
But the pain from this shock has been not quite as great as it was in the 1970s...Energy spending as a percentage of personal income was around 6% in the early 1970s. After the oil shock the share of energy went up to 9%. Compare that to this period when the share of energy in consumer incomes was about 4% prior to the price shock, rose briefly to 7%, dropped back to 5% and is currently around 6%. The impact on the share of income in both cases is up by 50% in terms of the rise of the share of energy as percent of consumer spending. But the overall importance in the level of spending of energy is greatly reduced in the recent period. So oil does not create the same havoc with consumer budgets when prices rise. And the change in the impact on spending was greater in the 1970s as the energy share rose by 3% points compared to 2% points this time. That is another important reason why the shock which by some measures as larger than in the 1970s has not been anywhere near as painful.
The shock is still reverberating. The pain is still in play. Unlike the 1970s shock this one was not the first shock we had seen. We were not totally unprepared; our energy efficiency is better. We had seen higher then lower oil prices since the spike in the 1970s. We now know oil prices are unpredictable. We now know the risk in oil. It has geopolitics, domestic politics, corporate politics and maybe a touch of economics hidden there some where. Oil prices do threaten the economy but not through $4/gallon gasoiline. The economy is coping and will cope with that, it's all the other stuff. And that my friend is still in play. The Fed still needs to show us that in the wake of the oil spike and its own balance sheet blowup it will not repeate the monetary mistake of the 1970s. That is one of the most devious aspects of oil, it entices policy makers to play with it and that is where the real danger lies. Watch that.
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Thoughtful article, Bob. It is all the other stuff.
If there is some rationalization of domestic energy policy, sensible regulatory, budget & tax reform we face significant opportunity, not withstanding the need for futher deleveraging. If that rationalization is not forthcoming...well, it will be bad.
You spelled "the" wrong. First paragraph...
Love the comments.
Thanks DaveyJones for reading and UNDERSTANDING that the issue here is global. Demand is not just about the US.
And my wry comment about a touch of economics (I am an economist after all) was directed at market pricing which is loosely related to reality and really a great example of fear and greed driving markets.
The point on energy spending as a share of personal income being so much lower is an obvious admission of the role prices play on the consumer side. But market pricing is a touch of economics and a bundle of witchcraft...Speaking of witchcraft... if he could REALLY guarantee $2.50/gallon gasoline maybe we should add eye of newt to the equation but not to the White House?
Don't encourage Davey Jones, the rest of us have to put up with him full time...
i love you too hulk
OK, so supposedly the country of Israel has gambled heavily (most likely with US aid payments) in oil futures. I am getting this deja vu feeling with the Silverstein (oye) insurance contracts taken out on twin towers ... for which he collected twice.
Even if Obama does not attack Iran under completely false pretenses (as he has promised his closest buds that he would do before the election ... does the antiChrist actually have buds?) ... Wall Street has been very helpful in raising oil prices even in the face of massive oversupply.
It is nice to have friends among the elitist verminati.
The Western world will just have to forget about the private car - it is just too wasteful.
Although British rail services is overpriced due to a fracture of maangement structures during a flawed privatisation process in the 80s it has seen explosive growth during the QE years.
The little Penistone line for example has been a great success over the last few years and although it was part of a failed Tram train project which can very difficult to execute it is earmarked by HMT for elec. changeover from its old DMUs withen the next few years.
www.youtube.com/watch?v=9W3WulmuRP0
Below is a typical station along the route - check out the growth of passengers during 2008/9 - this sort of numbers growth has been seen throughout the UK.
en.wikipedia.org/wiki/Honley_railway_station
Re "We now know oil prices are unpredictable."
If you predicted higher, you were right...
In the 70s / early 80s fixed capital investments into non oil producing power plants increased dramatically - this to some extent caused the 80s oil glut that was then wasted by the monetarists.
However now this low hanging fruit has been plucked for the most part - oil replacement for Transport is much more inelastic then power plant changeover.
The 64km Nantes to Chateaubriant line is now expected to cost 200Millionish when completed in early 2013
http://www.nantes-chateaubriant.paysdelaloire.fr
So if this new Tram train programme ever accelerates - a modest 4 Billion a year programme could produce 1280KM of electrified line + vehicles a year for the cost of a cheap Nuclear plant(don’t mention the EPR……)
http://www.youtube.com/watch?v=Rs47-o9oi4g
Although these are sensible investments they will save much less fuel oil per euro spent then on a Nuke plant.
The French nuke investment of the 80s had the effect of pushing up NG consumption in the Euro periphery - (2 to 3 Nuclear plants were coming on line during the peak years)
Even if France invests in regional electrical rail on this scale producing 2000 - 3000KM of modern line a year it simply cannot offset the decline in North Sea production.
"wasted by the monetarists" - that one's just ripe for a number of jokes
Yeah - I also should have said non oil consuming power plants rather then" oil producing power plants" (we would have no energy problems under those conditions) but you get the picture.
Good point....
This, combined with the last great oil fields under Anglo-Saxon hegemony, Prudhoe Bay and the North Sea, ramping up, was confused by some people to be Morning in America....
So... Oil costed as much as... A silver ounce back than?
Waw... Inflation adjusted that's... 150$... And we're already 1 factor higher now... So... 200$ isn't that unreal!
Go silver!!!
Retail margin compression is about to hit big time; either that or grocery prices pop further by 30%, or a 1/2 gallon of milk suddenly shrinks to 52 oz. at the same price.
The price hikes in the 70s were due to actual supply shortages, unlike in 2008 and today. Demand is down in the US and there is no shortage of supplies. So it's kind of funny this guy says, "maybe a touch of economics hidden there some where" can affect the price of oil. Ya think?
"demand is down in the US"
very good you get it. well done.
Shortages created by OPEC.
They (Sauds) had issue with our support of Israel back then.
One of the things they got out of the deal was support from the U.S. to ensure the monarchy would continue onwards. They were afraid of an Iranian revolution in their neighborhood.
All other arguments aside....,
A 6% energy cost relatvie to the consumer income is not the same today as it was back in the 1970s when you have other things costing more and real income remaining stagnent.
Chill, bros & sista's - it's gonna be alright. Count your blessings.
I do count my blessings. Everyday.
I'm working. Making money. Doing what I like.
I'm healthy. Happily married. Two good kids in their young 20's that are working and are doing well.
I'm aware. I'm watching what is happening and preparing accordingly. I'm ready for rougher times, if they come, and am planning better times, if they come.
It's a shame the insane evil clowns in Washington can wipe it all out in an instant.
I have to this day not seen a satisfactory explanation for the crude oil price plunge from $145 to 36$ from July to December of 2008. At the high, exactly the same arguments were being trotted out as today that price is going to 200$ a barrel.
FQ....
First off, focus on average monthly prices....
http://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm
The range is now $134-39.....
Take into account that demand dropped ~4% as the World economy collapsed and everybody was short in anticipation of the apocalypse...
The volatility in the oil market is driven by the perception of a glut or shortage. Studies have shown that the inelasticity is 0.06 or 1% swing in supply gives a 16% change in price....
Now you are aware that the amount of oil on the market (Net Exports) peaked in 2005 at about 43 mmbpd and has been falling at 600,000 bpd p.a. since...
Lehman collapsed. Or else it was Bear Stearns, take your pick. One of the two was trying to save themselves by running oil sky high and when they ultimately failed, the price collapsed. It was a cold, calculated move that had government blessing even though it was a crime against the American public.
Nope....
here's a valid explanation....
credit markets froze... lenders wouldn't lend to each other, much less qualified borrowers..
therefore, speculators couldn't lever up thier positions in the oil futures markets...
therefore the market found an ACTUAL perceived value of a barrel of oil at said time...
A satisfactory explanation? How about this:
We are ruled by insane evil clowns that are working for evil soul-less corporations that are headed by evil power-hungry money-hungry psycopaths.
Eh...maybe that doesn't explain the drop, but it explains most of why we're all screwed.
Ah...the Joker-Kiljoy Theory. You hit that one right on the nose
Hhmm. In layman's term, do some research on precisely how oil was recovered in the 70's in comparison to today. When oil companies are actually considering using tar sands (where the energy in one barrel's worth will recover ~1.5 barrels in a real nasty process) then you know they are getting desparate.
Gas up $0.02 over the weekend here in MA, selling for $4.04/gal in Lexington (rich, 90% white area of Greater Boston/Suffolk County).
gasoline prices are far more likely to impact razor thin margins in this economy. and no where are margins more difficult than in China. i suppose pinning yourself to the dollar has some unintended conequences. we have to keep trashing the dollar to avoid the real energy shock, and it looks like maybe Bernanke is losing this battle.i wonder how much FedEx and UPS are paying for gas? anyone know?
I did notice that Amazon.com started sending my packages via USPS instead of UPS...
UPS usually charges a gasoline surcharge as part of the fee.
They adjust them according to: http://www.ups.com/bridge/fuelsurcharge.html
(If you scroll down it will show the 90 day fuel surcharge history, it gives an idea of the rate of change)
In the first oil shock (1973 & 1979) prices were set by an oil cartel called OPEC.
They do not SET the price. Never have. When will you slugs understand that?
Is there a link to a time refund for the five minutes of my life wasted reading the above?
If so, please send the link....
Have you tried neutrinos??
Damn... those tachyons might have to be put on hold...
http://arstechnica.com/science/news/2012/03/new-detector-weighs-in-neutrinos-dont-exceed-light-speed.ars
News item in Boston about restaurant prices increasing 8.1% last year with beef rising 20%...yeah green shoots everywhere and given that waiters are one of the largest groups being rehired...look for a slowdown coming to a town near you soon...
#
We now know oil prices are unpredictable. We now know the risk in oil. It has geopolitics, domestic politics, corporate politics and maybe a touch of economics hidden there some where
plain stupid BS..
USA imports of energy is 10 years low, consider that population is 30+ mln bigger,..
#2 USA domestic production is multi multi multi years hi.
#3 USA natural gas production is all time high, and number one in the world..(hello GAZPROM).. gas price is also multi year low..
#4 REAL UNDER/UNEMPLYEMENT IS closer to 30%... USA economy never recovered from 2008 crisis, or actually from constant off-shorring of jobs that started since 2000-2001.. 45+ MLN ON food stamps. 50% of popualtion dont pay income taxes.
#5 USA DONT IMPORT TOO MUCH FROM ARABS.. thats myth.. biggest sources are Canada and countries(pretty much stable) of S.America..
based on THIS ECONOMICAL FACTORs OIL MUST COST LESS THAN 50$.. TOPS..
but price is fair now CAUSE FEB/BERNANKE/O'MAMA PRINTS dollars like mad,.. deficit of 8/10% GDP.. its been for 4 years in row, and WILL NOT END ANY TIME SOON.
so WHY HARD WORKING PEOPLE AROUND THE WORLD MUST EXCHANGE FINITE RESOURSES FOR MONEY MADE FROM PAPER ..
#uck YOU MR Bernanke/ O'MAMA/Congress and american citizens
alx
Given all these facts, what I'm hearing is "social experiment." You can't tell Americans what to do, but you can force them to behave a certain way by controlling energy prices.
Spot on Alex.
Regarding this comment; "USA imports of energy is 10 years low, consider that population is 30+ mln bigger"
All I can say is that the U.S. and the dollar are becoming less relevant every day. Look at world demand, it is a global market after all. Hedge accordingly (physical assets-especially those that generate revenue).
Once again, well said. The "whole world" never used to use oil, now they do. Guess what, there aint enough to go "around." And we're just 300 million in a 7 billion market. So we think we can "adjust" the market with boogeymen and bombers. Aint working. And it's using up a lot of oil too. Stupid. The PetroDollar is definitely dying but so too is easy supply relative to demand. One hell of a concoction. And unlike europe and the rest of the world who already deal with the "real price" we never have...and think we never will
The answer is: 3.5 billion tops. The only other question is: When? And perhaps, how?
Oil field depletion: it doesn't matter how many dollars you have, there are never enough.
People know a price spike is followed by a crash. Every single user believes he will survive it, he just has to endure high prices for a little while. Fuel consumption is in 'strong hands'.
This is an illusion.
The same strong hands are flat broke, scraping the bottom of the credit barrel. Instead of too much currency there is too little credit available to the energy costomer. Credit to the energy producer is pointless if he cannot find customers:
See Petroplus.
People conserve or onservation is gong to rammed so hard up peoples' butts their heads will explode.
I would also add that "credit is useless to the producer if the energy required to recover the energy is greater than said recovered energy".
The fiat capital is only half the equation. In the simplist terms, no oil company will invest a single barrel of oil (in terms of energy, btu or calories) in order to recover less than a barral of oil. In the 70's, if you invested a barrel of oil, you would recover more than 40 or 50, depending on the field. Now, if you invest a barrel of oil, you recover less than three on average. Tar sands? Yeah, invest a barrel of oil and get about 1.5 barrels back (hence, tars sands only become profitable when oil gets over $150 per barrel). Since Oil companies only care about profits, we will stop using oil with plenty of it left in the ground. In fact, they are already investing in other technologies.
Now, where in the hell are those cold fusion reactors already?
Well Said. So much of our society (and economic theories) are dependent not only on this stuff but on the false assumptions that (1) "incentives" will get it out of the ground and (2) there are alterntives with similar energy returns.
gentlemen, start your gardens
V is for Victory!
I think it's more appropriate call them Defeat Gardens
Naw...
"Endeavour to Persevere Gardens"
Congrats ZH...Dr. Brusca is a brilliant Economist!!!
Mom? Is that you? Thanks!
B
Perhaps this commentary might fly on Huffagton Post, but around here the world knows that oil racketeering is as the fraud-fiat dollars it buys and sells.
Thank the installed puppet, Nixon, and the masters of US Fed-fraud-fortitude for every crisis since -- EVERY ONE. Might as well name it the war on you, sukka.
In other news, fraud is up!