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2011 August 14 Sunday
Oil Price Catch-22 On Job Growth

At The Atlantic Daniel Indiviglio argues jobs growth brings higher oil prices which brings an end to jobs growth.

Since May, the U.S. economy has struggled. From May through July, just 72,000 new jobs per month were created on average. Yet February through April averaged 215,000 per month. What killed the promising progress we were seeing earlier this year? A couple of factors are often blamed, but the biggest problem was rising gas prices. Even though they have been declining lately, this might not be the last time that this recovery is plagued by consumer sentiment plummeting due to the price at the pump. We could see gas prices create a sort of catch-22 that makes it difficult for the U.S. economy to stay on its feet.

It is good to see articles like this one on a mainstream media site. Though Indiviglio's suggestion of a gasoline tax that varies inversely with the price of oil shows he doesn't get the scale of the change needed to deal with Peak Oil. One can find long time writers on Peak Oil who tie the depth of the current recession to oil supply problems and who propose solutions aimed at the root cause. For example, Gregor Macdonald says what Keynesian stimulation we do should be solely aimed at cutting energy input costs. Note that encompasses both efficiency and supply measures. Peak Oil writer (and former oil industry engineer) Robert Rapier expects the US economy won't be able to grow. Then when the US inevitably slips back into recession its oil demand will free up supply that China can buy. So every recession will shift oil away from the US toward China, India, and other industrializing countries. I see the same pattern. At some point China's own bubble will burst and dampen their oil demand. But we'll be poorer by the time that happens and will continue to be poorer afterward.

UCSD economist James Hamilton, who does a lot of modeling research on oil price shocks, believes believes that even though the price of oil has dropped (to a still high level in historical terms) the biggest effects of the previous price spike are still to come.

It is interesting that the biggest effects on GDP come 3 or 4 quarters after oil prices have gone up. This is not a result unique to this specification, but is something one finds whether one uses linear or a variety of nonlinear specifications and regardless of the data set. We often see some economic responses right away, such as a drop in consumer sentiment, fall in sales of less energy-efficient vehicles, or build up of inventories. But it usually takes some time for the effects of these to be multiplied as they ripple through the rest of the economy.

Fund manager Jeremy Grantham thinks Peak Oil is just the tip the iceberg for a much bigger natural resources limitation problem.

Share |      By Randall Parker at 2011 August 14 09:39 PM  Economics Energy


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Comments
Abelard Lindsey said at August 15, 2011 1:34 PM:

A link for you:

http://alfin2300.blogspot.com/search/label/peak%20oil

ziel said at August 16, 2011 4:16 PM:

The stranglehold of oil on the economy reminds me of driving a golf cart - just as soon as you start to really move, it just shuts down. If the economy heats up at all, oil heats up even more, immediately putting the brakes on consumer spending growth. When the economy starts to slow down, fortunately oil does too, which has kept us from dropping back into recession. But any kind of exogenous supply shock will send us cratering while, as you know, there is no opposite effect - an exogenous boost to supply - that could possibly occur.

Randall Parker said at August 16, 2011 8:41 PM:

ziel,

If our populace was Peak Oil aware and with longer time horizons then people would shift their car buying and lifestyles more rapidly to smaller and hybrid cars and live closer to work. That'd cut our oil demand faster than supply is dwindling for several years. At some point the downward slope will become apparent even to the mainstream media and masses. But I expect by then it'll be too late to adjust without an economic depression.

I didn't expect the end of economic growth to come quite so soon. I thought maybe we'd get lucky and eek out a few more years.

Our problem with oil is that Net Available Exports (which Jeffrey Brown defines as net exports of oil from oil exporting state minus China and India oil import growth) has actually shrunk by about 5 million barrels from peak. Oil exporters are consuming more domestically and China and India are importing more. The rate at which available oil shrinks is faster than the rate at which our economy is improving efficiency and shifting to other sources.

The US is outbidding some other importers. For example, oil consumption in the PIIGS is going down. But my guess is in the next recession US oil consumption will drop below the level it reached dropped to 2009 and the recovery will be to a level below where we are now. We are going to ride hills where each valley is lower than the previous valley and each peak is lower than the last peak.

Engineer-Poet said at August 19, 2011 7:33 PM:

If the US populace was PO-aware (or had a clue in general), Michele Bachmann's claim that she'd get gas prices below $2/gallon would have destroyed her political career.  It's insane, but people either don't know or (worse) don't want to believe it's insane.

What the USA really needs is gas prices upwards of $5/gallon (perhaps $8/gallon), via taxation.  The light-truck market should be 10%, not 50%.  Hybrids and cars like the Chevy Cruze Eco ought to be the majority of sales.  We need to look at fuel economy as patriotic and guzzling as treasonous.

Will we?  Eventually, but I fear nowhere near soon enough.

Abelard Lindsey said at August 20, 2011 10:32 AM:

Peak oil is purely political:

http://alfin2100.blogspot.com/search/label/peak%20oil

no i don't said at August 20, 2011 11:02 AM:

Is that "Peak Oil" phrase now another religious belief?

Are we to believe "Peak Oil" as a dogma it without any question?

Just asking

Engineer-Poet said at August 20, 2011 8:27 PM:

If you don't believe that US oil production peaked in 1970, you're deluded.  At best.

If you don't follow the evidence and conclude that world oil production must eventually peak and decline (there are no infinite phenomena on a finite planet, or in a finite universe), you're unable to reason and thus not fully human.

Randall Parker said at August 21, 2011 9:08 AM:

Abelard Lindsey,

10 years from now world oil production will be smaller than it is today. The US economy will most likely also be smaller than it is today. The US economy is now going into its second Peak Oil recession. It was unable to regain the level of production of 2006.

The only way the US economy can grow is for people to rapidly shift their car buying habits toward more fuel-efficient cars. That could enable the economy to grow for several years if we are lucky.

Abelard Lindsey said at August 21, 2011 6:11 PM:

10 years from now world oil production will be smaller than it is today. The US economy will most likely also be smaller than it is today. The US economy is now going into its second Peak Oil recession. It was unable to regain the level of production of 2006.

Actually, I expect oil production to be substantially larger 10 years from now than it is today, at least 50% greater if not double. I expect the U.S. economy to be larger 10 years from now than it is today. U.S. economic growth will resume once the deleveraging from the credit bubble is complete, around 2015 or so. The global economy will be a lot bigger 10 years from now.

Engineer-Poet said at August 23, 2011 5:50 AM:

How much would you be willing to bet on that?

no i don't said at August 24, 2011 2:35 PM:

"If you don't believe that US oil production peaked in 1970, you're deluded. At best."

Yeah, yeah, yeah, blah, blah, blah

You're dishonestly mixing the fact that "world oil production must eventually peak and decline (there are no infinite phenomena on a finite planet, or in a finite universe)" with the DOGMA that peak oil is going on right now.

So Engineer-Poet, don't be a naughty little smarty ass now. We all know that we will in fact run out of oil eventually (if we continue to extract oil), -that is obvious and true-, but don't call me deluted as you give the screen a dirty smile, just because I don't believe in the "Peak Oil" dogma that you hear from your media.

Bill Maher is right Americans are a stupid nation.

Even if oil deposits have been made from BILLIONS of years of decaying matter.

Engineer-Poet said at August 24, 2011 7:43 PM:

When world oil peaks, we'd expect to see stagnant production without any other obvious cause (e.g. embargo) while prices escalate.  That's precisely what we saw from 2005 to 2008, until the bursting of various economic bubbles reduced demand.  This is perfectly consistent with "peak oil is now"... and more to the point, there is no downside to acting as if it is, even if it isn't quite here yet.  After PO it's likely that inefficient oil-burning devices will become uneconomical to use before the end of their lifespan, and become stranded assets.  Avoiding their purchase makes sense.  Setting national policy to discourage their purchase by people with faulty expectations makes sense too.

no i don't said at August 25, 2011 4:55 PM:

"When world oil peaks, we'd..." "...there is no downside to acting as if it is, even if it isn't quite here yet..."

If you read your words more carefully, you'd avoid contradicting yourself so much. (But contradiction is the privillege of dogmatics, right Enggy?)

Yeah, I mean: Exactly. So by your statement... it's not peaking just yet, right? Which contraticts your previous statement that it peaked in 1970, right?

What else can I say... I r e s t m y c a s e

I'll continue to doubt it just a little, whether your are offended or not.

Engineer-Poet said at August 25, 2011 6:22 PM:

US oil production peaked in 1970, nitwit.  If you want to claim otherwise, argue with the Energy Information Agency instead of displaying your ignorance here.

Zamman said at August 31, 2011 7:11 PM:

I'm sorry, Will I also be an nitwit if I doubt the EIA?

Sorry Engineer Poet, calling people names for doubting government reports does not show your great intelligence.

Today's absolute truths many times become the absurd beliefs people had in the past. All I'm saying is, sorry I'm not so sure either.

Can we doubt? Just a little? Thank you for your consideration.

Engineer-Poet said at September 1, 2011 7:41 AM:

If you think the EIA is lying to the tune of several million barrels per day of domestic oil production, you're out of nitwit territory and well into paranoia.


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