2007 September 18 Tuesday
Oil Price Hits New High

The new price is still lower in inflation-adjusted terms than the peak during the Iranian revolution period in the late 1970s. But the high prices of today are looking less like a brief blip.

A barrel of crude surged to a new trading high of $81.90 on the New York Mercantile Exchange in the moments immediately after the Fed's decision. While light, sweet crude for October delivery settled at $81.51 a barrel, up 94 cents, prices continued to rise after the Nymex closed, hitting $82.38 in afternoon electronic trading.

When does the oil price rise trigger a recession? How high does the price of oil have to get to cause an economic downturn?

Goldman Sachs expects an average price for oil in 2008 that is higher than it is now.

The Goldman Sachs analysts said they were raising their year-end 2007 price forecast to 85 dollars per barrel, from 72 dollars, "with a high risk of a spike above 90 dollars per barrel."

They unveiled a 2008 average price forecast of 85 dollars per barrel, with a year-end price target of 95 dollars.

The price could rise high enough to cause a decline in US demand even as demand in China continues to grow. US consumers will shift to much more fuel efficient vehicles while tens of millions more Chinese start driving.

Share |      By Randall Parker at 2007 September 18 10:05 PM  Economics Energy


Comments
Kenelm Digby said at September 19, 2007 3:29 AM:

The price is being driven upwards by the Chinese boom..............yet day after day we are told that 'free-trade' is an 'unmitigated boon' that 'enriches us all'.

Wolf-Dog said at September 19, 2007 5:05 AM:

When the United States is inflating the money supply (by two means: lower interest rates, high government deficit, which together subsidize an annual trade deficit of $700), then China and other countries are accumulating a lot of money that can be used to buy raw materials, including oil.

But additionally, the lowering of the interest rates in the U.S. is also devaluing the dollar relative to other currencies, which is also responsible for the rise in the price of oil, at least for the Americans

Anon said at September 19, 2007 6:38 AM:

We could drill for oil off the East Coast of the US. There is quite a bit there. We could increase drilling in Alaska. We could make a deal with the Russians. But I guess that just isn't possible because it would hurt the seals, bunnies, etc...And we all know that oil is bad and that cars are bad. We could build more nuclear power plants, but we can't do that either because nuclear power is bad. The liberals and leftists and enviornmentalist types love this shit because it screws the middle class. This is their wet dream.

Ned said at September 19, 2007 6:38 AM:

These are the good old days. But seriously, the surging price of oil will have at least two beneficial effects: increased conservation; and development of alternative energy sources to replace vanishing imports from thug states (the Middle East, Venezuela, Nigeria, etc.). Plus less money for these rogue regimes to stir up trouble as exports dry up. All in all, not a bad deal, if the economy doesn't crash.

Randall Parker said at September 19, 2007 5:56 PM:

Wolf-Dog,

Dollar decline as price cut for other countries: Yes, huge problem for us. When China finally lets their currency rise against the dollar their oil demand will skyrocket and we'll get squeezed out of the oil market.

Anon,

Actually, about 30 nuclear plant construction license requests are going to get filed in the next year or so. The nuclear power industry is coming back in a big way. The utilities fear tougher emissions regulations on coal burners. Given tough enough regs on coal nuclear becomes cheaper.

Ned,

Yes, lots of investment in alternatives will produce other energy forms we can shift to. Our problem is not a general energy shortage. Our problem is really a transportation fuel energy shortage.

Wolf-Dog said at September 19, 2007 8:46 PM:

Randall Parker wrote: "When China finally lets their currency rise against the dollar their oil demand will skyrocket and we'll get squeezed out of the oil market."
------------------------------------------------

Excellent point... With nearly $1 trillion in dollar reserves, China will not "dump" the US currency as many people fear, but on the contrary, it will simply start a shopping spree, as many people who make serious money do. China will simply start buying everything: agricultural land in Argentina, entire uranium mines in Africa, oil fields in Sudan, corn fields in the Mid-West.

But then, as you said, this will have the effect of squeezing out the U.S. from many raw materials markets. And this will certainly cause price inflation for the average American.

But not so fast: at some point within a decade, the United States will become unable to afford this level of annual foreign trade deficit (as a percentage of the GDP), and this will also squeeze China economically, and this would lead to a depression in China similar or worse than the Great Depression, because China has a lot of bad investments that are exclusively geared towards producing junk that the U.S. is buying, for which there is little internal demand. Entire factories and cities in China will simply rust and disappear when deactivated. At that precise moment, China will no longer be able to buy raw materials, because money will not be available. Of course, it can be correctly asked that if dollars are not available to China to import raw materials, why can't they use their own currency to pay for the imports the way the Americans do with impunity (as trade deficit)? But for Yuan to replace the dollar (or Euro) in the world, political tension is inevitable.

Kenelm Digby said at September 20, 2007 3:42 AM:

Interesting that this post merges two themes Randall is interested in:
1/. The recent revelation by Alan Greenspan that the genesis of the Iraqi catastrophe (ie the cause of Iraq War 1), was due to concern for guranteeing a cheap, plentiful flow of oil to the West.
2/. The price of oil is determined solely by the viccitudes of the market ie by the iron law of supply and demand - the rise in price is merely symtomatic of demand outstripping supply.

Therefore it can be argued that whole Iraq catastophe was launched on bad economic premises, to say the least - it most assuredly has not 'guaranteed' cheap and plentiful oil - the price edges that of 1973 or 1980.
The irony is that American blood and treasure (not mention Iraqi) was wasted in order to secure oil for the Chinese industrial machine - He who has the deepest pockets (in this case foreign exchange reserves) gets the oil - pure capitalism at its rawest - only cash, wherewithal, moola,counts, everything else is an irrelevance.

Randall Parker said at September 20, 2007 5:58 PM:

Kenelm,

My curiosity on Iraq: Just exactly which bad premises drove the desire to invade?

Candidates:

1) The mistaken belief that Iraq has enough oil to make the invasion worthwhile.

2) The mistaken belief that money spent on an invasion to increase oil production was better spent on a military expedition than, say, subsidies to buy hybrids, research into solar, loan guarantees for new nuclear plants, or other ways to boost energy efficiency or energy production.

3) The mistaken belief that the Iraqis are Jeffersonian democrats.

4) The mistaken belief that Saddam posed a threat to Israel that removing him would eliminate.

5) The mistaken belief that Saddam had a real program to develop nuclear weapons.

I could go on. I figure all these factors played a role.

Wolf-Dog said at September 21, 2007 1:52 AM:

Randall Parker: the "candidate" 2) is closer to the truth, but not precise enough... For oil people, 2) was definitely the best choice, since it sabotaged the alternative energy R & D by wasting $500 billion in Iraq. This function of 2) remains true today. Thus the actual outcome of the Iraq was was not so important for the oil people, just the prevention of alternative energy mattered.

Kenelm Digby said at September 21, 2007 3:05 AM:

Randall,
My own opinion for (what is worth) is this:

Way back in 1990, people were spooked and panicked (unnecessarily if a little deeper thinking about the laws of supply and demand was undertaken), by the fact that Saddam 'controlled' or had the 'potential to control' a large portion of the World's oil deposits.
But here is the crucial factor, the political personalities involved at the time.Enter Messrs Thatcher, Bush (snr) and Gorbachev.
Thatcher, as is well known in England was at heart an aggressive bully who loved nothing better to win show-downs with male deviants (eg Galtieri, Scargill* etc)in what was probably some sort of Freudian castration/penis envy complex - she was never shy of bloodshed in her causes or innflicting the most cruel suffering on the weakest to benefit her particular snobbish 'born to rule' stratum of the British anally-retentive upper class.

George Bush basically was a weak man , terrified of being called a 'wimp', who was bullied, goaded and brow-beaten into the war in a series of long phone calls from the cocky, aggressive apparently invincible Thatcher.

Gorbachev was basically a very, very incompetent leader with very bad judgement, but with an almost slavish boot-licking tendency to curry favor with America, it was Gorbachev who gave the green-light to invade, something that would have been utterly unthinkable to the old-school Soviet leaders who would have stymied the whole plan.

It is all to eay to ignore the human element in debacles and to look for 'rational' explanations.


*Arthur Scargill, leader of Britain's National Union of Mineworkers (coal-miners) in the 1980s.Lead his men on a disasterous year-long strike in 1984-5, which he carastrophically lost and which in turn lead to the destruction of the coal-mining industry and his union.


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