Last year when oil was skyrocketing, peak oil talk was all the rage. Now you hear nary a peep save from the diehards. But commodity prices are grinding upward, in the face of rather sizable inventories.
Jim Hamilton also suggested a connection that has been generally overlooked, namely, that it was the oil/commodities price spike that put the dent in consumer budgets that kicked off serious deleveraging. I am not sure I buy that thesis, the deeper I drill into the crisis, the more I am convinced that the borrowing had hit the self-limiting point. Subprime defaults were rising in an economic expansion, an unheard-of phenomenon. So while the commodity price rise might have acted as an accelerant to the deleveraging, the debt bubble was destined to collapse under its own weight.
Nevertheless, this article presents an interesting theory on the relationship of oil prices and growth. Bottom line: historically, when the cost of oil expenses reaches 4% of GDP, the economy shrinks. And we are not that far from that trigger.
From the National Post (hat tip reader John D):
“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession,” wrote Steven Kopits, managing director for U.K.-based energy-consulting and -research firm Douglas-Westwood LLC in New York.
Kopits is a poster boy on all the “peak oil” websites….If Kopits is correct, so much for “green shoots”….Here is the roller-coaster cycle he points out: Higher oil prices mean recessions, recessions mean less consumption then lower oil prices which leads to less exploration and supply which leads to higher oil prices and recession again…
The reality suggests that there are only two antidotes to this vicious cycle. Gradual price increases mitigate the negative effect of oil price increases. Recessions follow jumps of 50% within one year. The Saudis and OPEC plus other producers would have to play a role in modulating prices. Or else consuming nations must reduce consumption dramatically through legislation, taxation and rationing…
Kopits on demand: “Consumption will tend to grow faster in developing economies for two reasons. First, by their nature, developing economies should grow faster than mature ones….So faster economic growth means faster growth in demand for oil. Further, oil consumption growth follows an “S”-curve. At low levels of GDP, oil demand growth is quite slow. Once a country has reached middle class income levels, per capita oil consumption stabilizes. However, in the middle, as a country becomes middle class, oil demand growth can be explosive. Take South Korea, for example. South Korean per capita oil consumption peaked in 1996; however, in the previous 12 years, the country’s consumption increased nearly fourfold. China is now firmly on the S-curve. Based on South Korean experience, we would expect Chinese oil demand to stabilize at around 50 mbpd around 2032-2035.”
(China currently 8 million per day, US 20 million, Japan 5 million).
Kopits on price: “If you have a flat—or heaven help us, declining—supply of oil, then the emerging and fast-growing economies will have no choice but to start bidding away the oil from the advanced or slow-growing economies. That is consistent with what we’ve seen in the data starting in about 2006. For China to grow, it will have to take away the oil of Japan, the US and Europe, just as it has in the last three years.”