Don’t worry, just a little bump - $70 is just around the corner. Short traders just keep making those margin calls, mortgage the house if you have to. Fortunes await you! PO is for pansies and doomers. At $70 short some more ..... it is going back to $22 .... the world is awash with oil ........ reality has nothing to do with it, its all in those charts!!!!!!!!!!
Posted: Thu Feb 17, 2005 10:45 am Post subject: Demand Destruction
Several quesitons have surfaced on this board recently as to the effect that high oil prices have on demand, and also, as to whether energy usage will decrease in the face of higher prices.
Normal economic theory suggests that this is the case, however, people have noted that in the current situation, the higher prices of the last year have not had much negative effect on demand.
Here is a little background data for the edification of the forum: The data is readily available from the US Dept of transportation, US Department of Commerce Bureau of Economic Analysis, and the BP Statistical Review:
a. As posted elsewhere, the mini-recession of 1991 resulted in a 0.17% decline in the US GDP, but resulted in a nearly 8% decline in gasoline usage. This was about evenly divided between people parking their cars, and people driving more fuel-efficient vehicles, each of which contributed about 4% to the overall reduction in usage.
91 vs. 90 0.960 0.953 0.946 0.998 0.925 1.043
91 vs. 90 4.04% 4.66% 5.36% 0.17% 7.55% -4.32%
b. The data below is the year-over-year change in US-GDP since 1965 (percent change) compared to the percent change in crude oil consumption per the BP Review. We can see from this that there have been three economic contractions since 1965, and in each of the cases, 1973, 1982 and 1991, there was a decrease in crude oil consumption in the US. There was only one other incidence of oil consumption falling year-over-year without there being a recession, namely in 2001.
c. The third column is the year-over-year (percent) change in crude oil spot price since 1965. In each of the cases, 1974-1975, 1980-82, and 1991, the recession was immediately preceded by an oil price spike of at least 100%. In the 2001 case, the price spike of 58% did not cause a recession, but was sufficient to cause a slight reduction in oil usage.
a. I am not at all sure there is direct causality between oil prices and demand destruction. However, it is clear that if the oil price increase is large enough (somewhere between 58% and 120%) there is a sufficient negative effect on the economy to cause a recession, and it is pretty clear that when the economy contracts, people use a lot less oil, and this even affects the driving public.
b. Which brings up the question: Why hasn’t there been a recession yet, in light of energy price increases? and I would say the answer is, for now, that the price increase has not been severe enough (yet) or fast enough (yet) to drive out demand. We still have not reached the yearly price increase total of 58% to test the 2001 case, although you can make the argument that the 2003-2004 two year total of about 60% will have a delayed effect. Maybe we will get the rare privelege of seeing this unwind before our eyes this spring and summer.
c. Maybe, also, this latest price spike is taking place slowly enough to allow it to work through the economy without killing off the GDP. Then again, maybe just a time lag effect. Example: oil went up about 60% between 1971 and 1973, but it was not until the hammer hit in 1974 that the recession finally occurred. We will never know what would have happened if the 251% price increase of 1974 had not taken place.
d. One other uncertainty is the massive amount of borrowed money being circulated in the economy right now, especially military expenditures and the spare change from people borrowing on their home equity and credit cards to bump up their consumption. This might be causing the economy to appear stronger than it is. This, too, will be wrung out in the next recession.
Others may wish to comment, and provide other data.
A small correction of my post, in light of this article, posted on Mr. Savinar's website: The 1991 mini-recession occurred after less than a 100% increase in oil price, so I mis-stated. It was only 52% in the two preceding years.
Quote:
Since early 1999, oil prices have risen about 350%. Oil demand growth in 2004 at nearly 4% was the highest in 25 years.
In 1997 and 1998 there was a 41% drop in oil prices, If you look at 1997-2001, the 58% overall increase did cause a demand decrease. However, this is just quibbling over which five-year period to look at, and I do not want to get into this argument.
I still stand by the main point, which is that demand destruction will occur, if the price shock is sufficiently fast and sufficiently large to cause a recession. I think McKillop agrees:
Quote:
World oil demand, for a host of easily-described reasons, tends to be bolstered by "high" oil and gas prices until and unless "extreme" prices are attained
So the only question is, what is an "extreme" price?
Posted: Thu Feb 17, 2005 10:34 pm Post subject: Re: Demand Destruction
pup55 wrote:
d. One other uncertainty is the massive amount of borrowed money being circulated in the economy right now, especially military expenditures and the spare change from people borrowing on their home equity and credit cards to bump up their consumption. This might be causing the economy to appear stronger than it is. This, too, will be wrung out in the next recession.
#1 factor, in my opinion. The consumer growth is fueled by home equity and credit spending (even for groceries), not from a growth in income (wages). The rise in interest rates will remove this buffer, as cuts in spending will be required to offset the increase in mortgage payments on variable rate mortgages. _________________ A Saudi saying, "My father rode a camel. I drive a car. My son flies a jet-plane. His son will ride a camel."
Live in Arizona? Check out: http://sustainablearizona.org and read my blog.
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