No worries, Cube. I am hired by 'them' for who I know and for what I know. My goal now is simply to have a long and happy life. I tried to pass some of that along here on Peak Oil, but for the most part people just do not want to know. It's a shame. They would sooner wear their ignorance like a badge of honor and defend that lack of knowledge with passion. I will finish Trader's Corner until year-end and then that is it for me. More than three years is enough. Time to move on to some more important stuff that I have been neglecting. Have a nice weekend. Cheers.

Jeff Rubin, Chief Economist at CIBC World Markets, in a recent report, is now saying that the current recession is caused by high oil prices. Defaulting mortgages are only a symptom of the high oil prices. We should be blaming the underlying cause--higher oil prices--rather than the symptom. These higher oil prices caused Japan and the Eurozone to enter into a recession even before the most recent financial problems hit. Higher oil prices started four of the last five world recessions; we shouldn't be too surprised if they started this one also.

Oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, and then some, to economies that sport the highest savings rates in the world.

While those petro-dollars may get recycled back to Wall Street by sovereign wealth fund investments, they don’t all get recycled back into world demand. The leakage, as income is transferred to countries with savings rates as high as 50%, is what makes this income transfer far from demand neutral.

Some of the best research indicates that it takes about a year for an oil price shock to have its maximum impact on US GDP. Leading macro and energy economist James Hamilton notes these lags fit the experience of past shocks, including the OPEC-induced recessions of the 1970s. Among other factors, the unwinding of an involuntary buildup of autos and other durables is a key determinant of the lag structure involved. It has also been found that a similar lag structure holds for the impact of large declines in oil prices. The virtual collapse in oil prices to $12/bbl in 1986 was a key driver behind a rebound in US economic growth to a 4%-plus pace, even in the face of mounting financial costs from the Savings and Loan crisis.

Given that oil prices really took off in the third quarter of last year, after several years of more gradual increases, we should expect to see its maximum hit on the economy right about now. By the same token, however, the impact from the even larger decline in oil prices over the last two quarters should give its maximum boost to the economy moving into 2009.

Comments

Based on the last two observations quoted, I would conclude that Jeff Rubin expects the economy to zig-zag in the future, first hitting a low point, and then a new high, and then a low point again. If peak oil is part of the equation, I would expect the height of the highs to gradually decline, and the depth of the lows to get progressively lower.

The question I have is with respect to his statement, "If triple-digit oil prices are what started the recession, then $60 oil prices are what will end it." I would agree that lower oil prices are necessary to end the recession, but it is not clear to me that they are sufficient.

It seems to me that we have a different problem at this time--a barely functioning financial system that governments around the world are trying to bail out. We also have a vastly oversized financial services industry that needs to collapse to a more reasonable size. In addition, there is a problem with non-availability of credit.

It seems to me that the problem with non-availability of credit, particularly long-term debt, is ultimately tied in with peak oil. It is difficult to have more than a tiny amount of long term debt once an economy is no longer growing. Repaying long-term debt is relatively easy in an economy which is growing, since funds available to pay back debt are greater in the future than they are at the time the debt is incurred.

In a declining economy, it is likely that either there will be many defaults, or that the debt will be paid back with dollars that are worth much less than when the loan was taken out. Because of these issues, lenders will raise interest rates to such a high level that few projects will generate a high enough rate of return to justify taking out these loans. I believe that ultimately long term debt will essentially disappear--but perhaps not for several years.

Unless we can get world's financial problems worked out, it seems to me that it will be difficult for the economy to get back to business as usual. Instead, we will find more workarounds like Thailand's recent rice for oil deal or China's $25 billion loan to Russia in return for oil. Without a solution, we are likely to have a continued recession. If the financial problems suddenly take a turn for the worse--say, the US dollar is no longer the reserve currency, the US economic situation could take a sudden large step downward.

One of my teachers decided to host a session with the whole class to talk about all this going on. Economists in training, on post-graduate level, couldn't or wouldn't understand the need for free market, now more than ever, I found out. The poor teacher certainly didn't see this one coming.

If every one of us just wants something for free, and the government just wants to get re-elected, you would expect at least the very students of the science of efficient distribution of scarce resources to be the first to understand the dangerous and self-consuming feedback loop. Yet, there's an idea in the air that money can simply be thrown into the hole to plug it. I was not impressed.

Expect more shouting and throwing good money after bad. Great thread; these insights will be sadly missed.

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Look, basic resources have to be "allocated" in a sane manner when their scarcity is an ongoing problem, at least through the transition phase. Free market ideology, even in it's purest ideological forms, doesn't allow for this.

WRONG

There is something called "price".
When a resource becomes scarce it's price rises (supply/demand) thereby limiting it's consumption.

The recent run up in oil and commodities, shows that these resources can be effectively pirated,

Look, basic resources have to be "allocated" in a sane manner when their scarcity is an ongoing problem, at least through the transition phase. Free market ideology, even in it's purest ideological forms, doesn't allow for this.

If you are suggesting the price rises were due to speculation you're wrong. Commodities that are not traded on exchanges experienced similar rises such as iron ore and aluminium. Speculation may have pushed prices higher at the peak, but supply and demand was the primary factor with a declining dollar a secondary factor.

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The recent run up in oil and commodities, shows that these resources can be effectively pirated, through various markets and exchanges. The prices aren't merely reflections of supply and demand.

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The price SHOULD rise, in an atmosphere of insufficient supply. But the question is how much?

It is trade in it's purest form.

I would much rather let my fate be determined by the "free-market" rather then a government bureaucrat.

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You're not going to have the chance. I will laugh most cruelly, as you are forced to accept the strictures of govt intervention and the hideous consequences of adequate food, water and shelter, over disease, homelessness and starvation.

The data for March was signifying a strong downturn in demand for iron ore. Somehow this translated into increased prices in the summer, while demand was actually slowing. Price fixing, is my guess, another form of piracy.

I'd like to thank you for helping to illustrate my point with another example.

It is reported that big iron ore miners expect pressure from the world steelmakers for significant price cuts of 20% to 40% less than 2008 levels when supply contract negotiations open.

The Wall Street Journal also reported that Vale, BHP Billiton and Rio Tinto are girding for price cut proposals when the 2009 contracts are signed next spring. That would be a sharp reversal from 2008, which had seen spot prices more than triple to USD 200 per tonne before the recent slide back to USD 70.

Vale of Brazil, already has withdrawn a mid contract hike of 12% proposed earlier to Chinese steelmakers.

With demand for autos, construction infrastructure and appliances weakening, steelmaking is being throttled down globally. Vale also has announced it will slash iron ore production by 10% of capacity or 30 million tonnes in the last two months due to the impact on steelmaking from the worldwide financial crisis and slackened economic growth. Vale also indicated in a statement that so far in 2008, they already shipped 320 million tonnes of iron ore, but the total will plunge by about 20% from 2007. Rio Tinto, another global supplier, and Cliffs Resources in the US also are reducing production at some of mines and idling pellet-making facilities.

The very word "purest" cancels your thought about free market theory being the "least ideological". It is ridiculously ideological. I would almost rather have a discussion with a hard core Leninist or a committed Nazi fascist, than try to explain the limits (not errors) of free market theory.

SAN FRANCISCO (MarketWatch) -- China unveiled on Sunday what it described as a "massive" economic stimulus package worth over half a trillion dollars in an effort to reverse slowing economic growth in the world's most populous country.

China's state-run news agency Xinhua said Sunday that the program will "will loosen credit conditions, cut taxes and embark on a massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand."

The package is valued at about 4 trillion yuan ($586 billion), to be spent over the next two years.
"This is a shift long advocated by analysts of the Chinese economy and by some within the government," Xinhua said. "It comes amid indications that economic growth, exports and various industries are slowing."

The decision was announced Sunday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday.

Last month, China reported that its gross domestic product grew by a less-than-expected 9% in the third quarter, marking the fifth straight quarter in which growth has slowed.
Researchers at the International Monetary Fund said last week that world output would fall to 2.2% growth in 2009, down from 3.7% pegged for 2008. The growth forecast for China was cut to 8.5% in 2009, down from a previous forecast of 9.3%. See full story.

Funds from the stimulus package will be spent in ten major areas that include low-income housing, rural infrastructure, water, electricity, transportation and improvements in the environment.
The report said spending will also include "rebuilding from several disasters," most notably the May 12 earthquake in Sichuan province.

The package also includes a "comprehensive reform" in value-added taxes, which Xinhua said would cut industry costs by 120 billion yuan ($17.5 billion).

In an effort to boost lending, credit ceilings for commercial banks will be abolished. This is intended to channel more lending to "priority projects," which were described as rural areas, smaller enterprises, technical innovation and "industrial rationalization through mergers and acquisitions."

Experts had been predicting such a move by the Chinese government.
"As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive," Merrill Lynch economists T.J. Bond and Ting Lu wrote in a report Friday. "This is a key theme for China and indeed, the entire Asian region." See full story.
Chinese monetary support is already in full swing, with more easing expected. Since September, the policy-setting People's Bank of China has cut interest rates three times, twice lowered the required ratio commercial banks have to keep in reserve, and removed caps on lending to encourage investment.