2007 October 17 Wednesday
Oil Hits $89 Per Barrel

The market keeps driving up the price of oil.

Crude oil prices continued a months-long bullish run with another record-setting day: On Oct. 17, the price for a barrel of light sweet crude surged above $89 on the New York Mercantile Exchange, the highest mark recorded since contracts started trading on the exchange.

Given trends in world oil production I think the price of oil will go higher.

T. Boone Pickens expect the price of oil to hit $100 within a year.

"Within a year you're going to see $100 oil," the Texas billionaire said. "It's going to get very dicey here in the fourth quarter."

But how about some demand destruction? In spite of economic growth and population growth the United States used less motor fuel in the last 4 weeks than in the same period last year.

Demand for the motor fuel over the four weeks ending Oct. 12 was 0.5 percent lower than a year earlier, averaging about 9.2 million barrels a day.

I'm expecting greater demand destruction as people shift toward more fuel efficient cars and make other changes that reduce their use of energy for travel.

Rising demand from China is driving up prices and squeezing out some US demand.

China overtook Japan as the world's second-largest consumer of oil in 2003 and is closing in on the US, with demand for oil growing at about 15% a year.

The rising price of oil is a drag on economic growth.

The economic impact of the latest surge in oil prices, which started to soar only this month, could be substantial. The rise could reduce consumer enthusiasm, particularly for lower-income Americans. Some economists believe that if the oil price hits $90 a barrel and stays there for a few weeks, businesses could start passing on their higher costs. A rise in oil prices will also make the Federal Reserve's job more difficult as it tries to keep the economy going while maintaining price stability.

"If the price holds, it will be a real oil shock," says Don Norman, an economist at Manufacturers Alliance/MAPI in Arlington, Va. "But I'm not sure if it's enough to knock the economy into an outright recession."

The declining US dollar cuts the cost of oil to countries whose currencies rise against the dollar. The rising price of oil in dollars gets at least partially cancelled out in Europe, for example, by the rise in the Euro against the dollar. So some countries aren't seeing the same oil price rise that the United States is experiencing.

If the US dollar eventually gets hit by a big decline against East Asian currencies that will lower the cost of oil to China and therefore Chinese demand will rise even more rapidly and push up the price of oil in US dollars even more rapidly.

Share |      By Randall Parker at 2007 October 17 08:30 PM  Economics Energy

Stephen said at October 17, 2007 11:31 PM:

tax it.

That'll reduce demand and at the same time the government can make a buck which it can use to pay for the war that was designed to keep oil prices low in the first place!

Seriously, if there is indeed a need to transition oil users away from oil, then its better to encourage the process with a tax that would rise at a known rate each year for a fixed duration. That way people will plan their investment and the economy will be better insulated from future oil-shocks.

Kenelm Digby said at October 18, 2007 4:50 AM:

Every day 1000 'new' (ie cars that are not replacing existing cars), cars appear on the streets of Beijing.
Of course this trend must be replicated in every other part of China.
The real issue here is that we must question the 'benefits' of free-trade and the shibboleth that it it is a 'win-win' game that 'enriches us all' that is hammered home by the political class and 'enonmists' so effectively that it is virtually unquestioned.
The simple fact of the matter is that China gets the oil - at America's expense - because it is more productive, no 'ifs' 'buts' or 'ands' are needed.The words 'zero sum game' spring to mind.

Anon said at October 18, 2007 6:26 AM:

Fuel is already taxed at a ridiculous rate. Higher taxes only finance the system that brought us to this situation in the first place.


They gov't takes enough, thank you. I would not actually mind if dedicated gas taxes actually went to building nuke plants, wind farms, hydro projects, etc..., but they won't and probably never will. The money is spent on bullshit like education, useless minorities and other social programs. I finance enough failure already and hand over more every year.

And Mr. Digby, look on the plus wide of our trade "relationship" with the PRC. We are getting extra lead in all of our products, for free!

Audacious Epigone said at October 18, 2007 3:06 PM:

Higher oil prices alone won't dampen low-income consumer enthusiasm that much. Notice that in the face of this latest oil price surge, gasoline has stayed relatively stable, actually declining a little over the last couple of weeks. It's at the pump where consumers on a tight budget feel the pinch, and the slight decrease in total gas consumption year-over-year has been beneficial in terms of domestic refineries' ability to meet immediate demand.

It'll all catch up with the economy soon enough, though.

Stephen said at October 18, 2007 4:30 PM:

I find it hypocritical to on the one hand want less government involvement, while on the other hand wanting daddy to stop your neighbour spending their own money on buying stuff from China. Frankly, the US economy would be down the tubes right now if it wasn't for China generously accepting US dollars in return for the stuff they make.

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