why the economy is not reacting to this oil price

mmm · Tar Sands Joined: Jul 05, 2004 Posts: 37

Much has been made about how the current oil price of $55 is below the 1981 inflation-adjusted price of $80.

But one thing I've been considering -- if it currently takes half as much oil to fuel a unit of GDP as it did in 1980, wouldn't we expect the economy to easily absorb an oil price of $100 or more? It would have to go to $160 in order to be equivalent in effect to 1981's price of $80.

Or am I missing something? Certainly the amount of oil it takes to fuel an increase of GDP is not consistent across all sectors of the economy -- air travel being an obviously hard-hit sector under a scenario of increasing oil prices. But could this explain why we are seeing no slowdown in response to the increase in the oil price?

pepper2000 · Heavy Crude Joined: Oct 15, 2004 Posts: 123

From what I've heard, there actually is a slowdown beginning already. It just takes time for the high oil prices to affect the rest of the economy.

I don't think the issue is so much whether they are high compared to what we've seen in the '70's and '80's, just whether they are high compared to what has recently been the case. If the price suddenly jumped from $10 a barrel after having been at $5 for many years, even that would have an adverse effect on the economy.

trespam · Posted: Sun Oct 24, 2004 1:37 pm Post subject:

Improvements in GNP/barrel may reduce the drag of current oil prices on the economy. But consider also that the economy is like an aircraft carrier. It will continue in a particular direction for a time. The effect of oil prices have not worked their way through the system yet. Also consider that the fed pumped up the economy by dramatically lowering interest rates. Right now, the economy could be running on fumes and will dip into recession sometime after the new year.

Zeiter · Tar Sands Joined: Sep 22, 2004 Posts: 44

There doesn't seem to have been a significant slowdown yet, that is true, but I would expect the effects of higher oil prices to lag a bit behind the actual oil price increases because the prices have to make their way through the ecomony first. The things that feel the effects of higher oil prices first are gasoline prices and the airline industry. They are the "canaries in the mineshaft", if you will. And things do not look good for them. One of the airlines just laid off 1,100 workers, and gasoline prices are back above $2.00 (although there's speculation that prices should actually be up to around $2.60 if they we're to correlate as they should with oil prices. A little pre-election manipulation, perhaps?)

The longer the price stays above $55, which, in inflation-adjusted terms has been enough to cause recessions in the past, the more the broader economy as a whole will begin to slow.[/i]

pea-jay · Posted: Sun Oct 24, 2004 1:59 pm Post subject:

Part of the delay has got to be sheer momentum. Large ocean vessels take a long time to stop or change direction due to their immense size. The same goes for the economy. It takes a long time for a stimulus-high oil prices-to work its way in. Why? because a lot of decisionmaking is ignorant or inflexible to price swings. A lot of construction occurs within the context of contactual obligations. Therefore price increases to raw materials are ignored (if they were hedged prior to purchas) or eaten by the purchaser (because they don't want to get a half completed product or get sued.)
Once the contract is completed, then prices can go up. Once they go up, then consumers can make the rational decison to buy or not.
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smiley · Fission Joined: Apr 16, 2004 Posts: 2107 Location: Europe

I wouldn't put too much value on the GDP-growth. A lot of the 'growth' is actually inflation.

Furthermore housing prices have a large influence on the GDP. To call the exorbitant price rises of the past few year economic growth sounds strange to me. Indeed you have more money on paper, but you have to sell your house in order to get it.

Finally, the debt is growing faster than the economy.

In my book economic growth should increase the average level of well-being of the people. We're not seeing that. Wages are stagnant while the costs of living skyrocket. Few jobs are created and millions disappear.

What we're looking at is the blowing up of bubbles and a bit of spin-magic from the FED. Meanwhile the 'real' economy is hurt by the oil prices. Look at the airline sector, the car industry, the metal sector etc. All are engaged in heavy cost cutting programs to compensate for the higher fuel and materials costs. That is slowly going to creep through the system affecting also the companies with less oil exposure.

chris-h · Heavy Crude Joined: Oct 11, 2004 Posts: 447

The economy will have no problem until $75
After that ...
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savethehumans · Light Sweet Crude Joined: Oct 20, 2004 Posts: 1541

Well, $75 should show up next year, possibly by spring, so we shall see....

The_Virginian · Light Sweet Crude Joined: Jun 19, 2004 Posts: 1428

Who says it's not?

When Housing, energy, and food prices are not even in the CPI, and it's "Election" reflection time, well everything is just dandy.

WE are GROWING!

Monitary Supply.

Energy Prices.

Debt.

And Imports.

Yep, good GDP to me.
5flowerface

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lotrfan55345 · Posted: Mon Oct 25, 2004 3:01 pm Post subject:

smiley · Fission Joined: Apr 16, 2004 Posts: 2107 Location: Europe

theshadypeach · Heavy Crude Joined: Oct 13, 2004 Posts: 121

Would you think that aneconomic recession is a good thing? It'd slow down our momentum on our crash course. I'm just wondering if you think if such economic slowdown will limit the national oil consumption.

leal · Posted: Tue Oct 26, 2004 1:25 pm Post subject:

As you can see on the lower graph on this page:
http://www.eia.doe.gov/emeu/steo/pub/fsheets/RealMogasPrices.html

the gas prices is going down Embarassed

Cool Hand Linc · Posted: Tue Oct 26, 2004 1:55 pm Post subject: some effects

I have noticed the car lots are full of V8 powered trucks. The worst users of gasoline. People are starting to dump the guzzlers.
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