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Effects of rising oil prices on the economy

General discussions of the systemic, societal and civilisational effects of depletion.

Effects of rising oil prices on the economy

Unread postby GoghGoner » Thu 01 Feb 2018, 06:40:50

From an economic impact view of increasing oil prices, gasoline and diesel prices continue to increase. We can expect even higher prices of gasoline once the summer fuel mix starts if these oil prices hold. I'll be spending some amount of time trying to tease out economic effects this bull cycle.

The current situation is that we have had two years of low oil prices and the global economy is now returned to levels not witnessed since before the great oil spike of 2007-2008. Demand is looking strong and there is no reason prices will not keep rising until there is a hiccup in the growth. Oil market gains have been limited by the perceived ability of shale oil producers to increase production significantly in 2018. A combination of strong growth and lower supply realizations could set up for a price spike -- not probable but something that I'll be watching.
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Re: Effects of rising oil prices on the economy

Unread postby rockdoc123 » Thu 01 Feb 2018, 10:42:36

perhaps getting the basic facts correct will help:

Demand is looking strong and there is no reason prices will not keep rising until there is a hiccup in the growth.

Demand has continuously been increasing since 2009, it kept increasing through the price drop in 2014. There has been relatively little change in demand growth throughout this period.

Oil market gains have been limited by the perceived ability of shale oil producers to increase production significantly in 2018.

Thats the exact opposite of what is happening. Too much oil on the market results in lower prices as we saw happen in 2014. If the shale oil producers fail to increase production significantly in 2018 and Saudi and Russia continue on with their production levels purposefully constrained that means the market will not be oversupplied. If the US shale players respond aggressively and increase production then prices will fall once again.
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Re: Effects of rising oil prices on the economy

Unread postby GoghGoner » Thu 01 Feb 2018, 15:16:20

Here is a recent analysis. It is interesting to consider that as oil prices rises, oil demand is moderated by increasing unemployment in developing countries.

Existing literature has mostly focused on the relationship between unemployment and oil prices of developed countries, the current study used the data from developing country Pakistan to investigate the relationship between oil prices and unemployment. The current study used monthly data from the period 1991:01–2010:12, making 238 observations of each variable for analysis and employed Toda Yamamoto causality test. The results of current study suggested the significant effect of oil prices on unemployment
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Re: Effects of rising oil prices on the economy

Unread postby GoghGoner » Fri 02 Feb 2018, 07:32:02

Airlines fares have seen price deflation 2014-2017 that will be ending this year. Airline passenger rate has a negative relationship with prices and after declining for a few years is now back above the rate achieved in 2007. Airlines are very exposed to oil prices.

Airline fare inflation graph (I am using Firefox screenshots so let me if there is an issue with this):

Image
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Re: Effects of rising oil prices on the economy

Unread postby Tanada » Fri 02 Feb 2018, 12:33:04

GoghGoner wrote:Airlines fares have seen price deflation 2014-2017 that will be ending this year. Airline passenger rate has a negative relationship with prices and after declining for a few years is now back above the rate achieved in 2007. Airlines are very exposed to oil prices.


This is something that was very apparent from 2005-2013 during which period we had a lot of Airlines going bankrupt or being forced to merge to stay in business. The 2014-2017 period of moderating and lower fuel prices has been a great gift to the Airline industry, but as the glut fades how long until we start seeing air travel once again fall to lower levels driving more companies into bankruptcy or forced mergers?

In addition to the Airlines themselves the two biggest aircraft suppliers, Boeing and Airbus, were seriously discussing ending their largest passenger aircraft production lines because the airlines were finding it difficult or impossible to get full passenger cabins for the Boeing 747 and Airbus A-380 without large scale over booking. You can get away with a small amount of overbooking because life happens and people miss their flights which would leave empty seats. For an airline an empty passenger seat is a serious issue because all of the profit they make on a flight comes at a threshold passenger load. The higher the fuel price the greater the percentage of passengers on the aircraft necessary to turn a profit on a given flight. When fuel prices are in the ranges they were from 2009-2014 they need every seat full to have a profit margin on that flight, and they really need that to make up for flights where the plane needs to be in a different city a certain number of hours later but not enough passengers wish to travel from the origin city to the needed city in the allotted time slot. This forces the Airlines to 'dead head' an aircraft even if there are only a few passengers paying for the trip, or occasionally no passengers at all. This makes filling up the popular route flights extremely important to the overall airline profitability and hence the creation of overbooking. Well when you are talking about a 747 or A-380 and you overbook enough to make sure the plane leaves full instead of having one or two disgruntled passengers who couldn't get a seat you might have six or twelve, and the more you have the more likely you are to end up with an unpleasant backlash. At some point it is actually better for the Airline to fly two smaller aircraft a half hour apart to and from the same destination than it is to pack all of them into one jumbo jet. Sure there is more maintenance and a greater number of total cabin and flight crew but it is still more economic than nuisance lawsuits and bad press.

Boeing and Airbus have both been struggling to sell enough copies of their super jumbo passenger planes to turn a profit on those lines. Airbus especially invested billions in design of the A-380 and setting up the construction plant to assemble the aircraft and has never shown a profit on sales because they didn't come close to expectations for sales. The A-380 is just so big that many airports are not capable of handling its massive ground weight, nor do they have the double decked loading jetways to rapidly move the high passenger load on and off the aircraft. Airbus was expecting a massive sales commitment which would have forced the purchasing airlines to pressure the international airports around the world to upgrade their facilities to work with the mega jumbo A-380. This is basically the same problem Airbus management had with selling the Concorde in the 1970's, they designed the plane they expected the Airlines to want instead of working with the airlines to provide what they actually needed. If Airbus was not taxpayer supported making these kind of mistakes would have killed the company either or both times they made it.
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Re: Effects of rising oil prices on the economy

Unread postby KaiserJeep » Fri 02 Feb 2018, 15:56:31

The Boeing 747 and the larger Airbus planes are for over-ocean flights, as such planes use so much fuel in takeoff that short trips just are not profitable. Over ocean flights suffer from lots of impacts, most of which are political. The 747 design is from 1969 and many variants are still in production for cargo and passengers, although the cost of some of these exceeds the original $23M per plane by 4X (which is really 2X plus currency inflation). The few Concordes seated 90-120 passengers, not enough for any application really.

The lion's share of airline profits is from shuttle flights and medium range transcontinental voyages, using medium sized planes. Fuel costs are the dominant factor there. This segmant is vulnerable and I for one would miss it, even though other members are doing as much as possible to make me feel guilty about travelling by jet. But I still remember taking a Boeing 707 for the first time as a teenager. That's almost as distinct a memory as the many DC-3 flights to Nantucket as an adult.

The likely successor to the 747 would be a stretched model of the 787 composite-bodied airliner with the electric controls that replaced hydraulics. The impetus to develop this and the later Airbusses was the approximately 20-25% fuel that such jets save versus conventional metal planes with hydraulics.

I'm sorry I never got to fly on a Concorde. I think the time has arrived for hydrogen-powered sub-orbital space planes myself. Two hours from the USA to Australia is a vacation I could go for....
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Re: Effects of rising oil prices on the economy

Unread postby ROCKMAN » Fri 02 Feb 2018, 17:19:04

Doc - Yep, some are catching on to the time lags and feedback loops. But some till can't imagine how slowly the dynamic adjusts.
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Re: Effects of rising oil prices on the economy

Unread postby ralfy » Fri 02 Feb 2018, 21:22:00

The global economy needs rising consumption, especially through a growing middle class, and that can only happen if oil prices are kept low.
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Re: Effects of rising oil prices on the economy

Unread postby rockdoc123 » Fri 02 Feb 2018, 23:42:12

The global economy needs rising consumption, especially through a growing middle class, and that can only happen if oil prices are kept low.


yet demand/consumption continued to rise that whole period from 2011 through 2014 when oil prices hovered above $100/bbl. So what do you consider as "low"? Obviously it must be above $100
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Re: Effects of rising oil prices on the economy

Unread postby GoghGoner » Sat 03 Feb 2018, 08:13:48

rockdoc123 wrote:
The global economy needs rising consumption, especially through a growing middle class, and that can only happen if oil prices are kept low.


yet demand/consumption continued to rise that whole period from 2011 through 2014 when oil prices hovered above $100/bbl. So what do you consider as "low"? Obviously it must be above $100


2011-2014.

Demand grew significantly in the Middle East. It grew in Asia. It fell/flat-lined in the US and Europe.

Demand growth is very strong in oil importing nations this past year and is much stronger in the period mentioned. It is not some kind-of of linear line that you seem to imagine it to be.

You are saying oil when you should be saying "all liquids".
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Re: Effects of rising oil prices on the economy

Unread postby rockdoc123 » Sat 03 Feb 2018, 11:38:37

Demand grew significantly in the Middle East. It grew in Asia. It fell/flat-lined in the US and Europe.


and your point would be? You said "the global economy needs rising consumption", now you are changing your tune to talk about regional economies? Perhaps you should get your story straight?

Demand growth is very strong in oil importing nations this past year and is much stronger in the period mentioned. It is not some kind-of of linear line that you seem to imagine it to be.


Jesus wept....what do you think determines global demand.....it is the total demand for oil across the world. If oil was not fully transportable to markets around the world then you could be concerned about regional demand. And I'm afraid it is pretty much a linear line when you look at global demand. I've posted graphs of that numerous times here.

You are saying oil when you should be saying "all liquids".


and why would that matter? The reason EIA and others include condensates along with oil is all of those "liquids" are largely fungible. As Rockman has pointed out many times the oil that refineries buy is a blend of several different oils and liquids. Some refineries have high demand for light oils, some have high demand for heavy oils, it all has to do with how the refinery was kitted out to begin with.
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Re: Effects of rising oil prices on the economy

Unread postby ralfy » Sat 03 Feb 2018, 12:09:23

My understanding is that most of the world population do not belong to the middle class. That means they use oil for necessities, and might explain why, as shown in Fig. 1 of this article, as overall oil consumption rose, it dropped for the U.S., EU, and Japan but was negated by the rest of the world.

The problem is that a capitalist global economy does not thrive on meeting basic needs only. It requires a growing global middle class, and that can only happen not only with cheap oil but with cheap material resources, and not only with cheap material resources but a lot of it such that biocapacity per capita is reversed.
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Re: Effects of rising oil prices on the economy

Unread postby GoghGoner » Sun 04 Feb 2018, 07:58:27

rockdoc123 wrote:And I'm afraid it is pretty much a linear line when you look at global demand. I've posted graphs of that numerous times here.


Yeah, when the timeline is expanded, the graph loses granularity. There is a huge difference of demand growth of 1.8 mbd vs 1.3 mbd. If supply is less than demand, inventories fall like they did the past year.

Here is the latest from the IEA that explicitly states that demand is affected by price. That is econ 101, rockdoc.

The slowdown in 2018 demand growth is mainly due to the impact of higher oil prices, changing patterns of oil use in China, recent weakness in OECD demand and the switch to natural gas in several non-OECD countries.
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Re: Effects of rising oil prices on the economy

Unread postby rockdoc123 » Sun 04 Feb 2018, 12:01:12

Yeah, when the timeline is expanded, the graph loses granularity. There is a huge difference of demand growth of 1.8 mbd vs 1.3 mbd. If supply is less than demand, inventories fall like they did the past year.


The point is not that it is increasing at slightly slower or faster rates, the point is demand was increasing and still is. It is not decreasing and that is the point that the ETP twits seem to not understand.

Not sure what it is you are arguing here about. My original comment was to the comment someone made that rising consumption can only happen if oil prices are low. That is patently incorrect according to recent history. $100/bbl did not kill demand, it was oversupply that made the price drop. Obviously there is a high price that will cause problems but we have yet to test it.
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Re: Effects of rising oil prices on the economy

Unread postby GHung » Sun 04 Feb 2018, 14:07:57

rockdoc123 wrote:
Yeah, when the timeline is expanded, the graph loses granularity. There is a huge difference of demand growth of 1.8 mbd vs 1.3 mbd. If supply is less than demand, inventories fall like they did the past year.


The point is not that it is increasing at slightly slower or faster rates, the point is demand was increasing and still is. It is not decreasing and that is the point that the ETP twits seem to not understand.

Not sure what it is you are arguing here about. My original comment was to the comment someone made that rising consumption can only happen if oil prices are low. That is patently incorrect according to recent history. $100/bbl did not kill demand, it was oversupply that made the price drop. Obviously there is a high price that will cause problems but we have yet to test it.


After 2008, consumption dropped significantly until QE and ZIRP kicked in, which is about the time oil prices jumped up as consumption began to rise. Hard to determine true cause and effect when markets and consumer confidence are being manipulated to such an extent.
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Re: Effects of rising oil prices on the economy

Unread postby rockdoc123 » Sun 04 Feb 2018, 15:17:33

After 2008, consumption dropped significantly until QE and ZIRP kicked in, which is about the time oil prices jumped up as consumption began to rise. Hard to determine true cause and effect when markets and consumer confidence are being manipulated to such an extent.


whether QE had much to do with it or not the fact of the matter is that prices over $100/bbl did not affect demand for over 3 years. And when prices dropped due to oversupply demand continued to rise. Global GDP continued to rise over that period as well which means that we have not tested a price yet that causes the economy to contract.
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Re: Effects of rising oil prices on the economy

Unread postby Outcast_Searcher » Mon 05 Feb 2018, 23:24:52

GoghGoner wrote:Here is the latest from the IEA that explicitly states that demand is affected by price. That is econ 101, rockdoc.

Maybe before trying to pontificate about economics, have the first clue about it?

First, they're talking about reduced demand growth, not reduced demand.

Econ 101 also teaches about inelastic demand. That's oil products like gasoline for the consumer. For the driving people really need to do (go to work, the store, etc), demand is HIGHLY inelastic because people feel they NEED that transport fuel to get by. So even if you triple the gasoline price or multiply it by ten, in the short term, people will generally drive enough to get to work and the grocery store etc. Optional driving can dry up in a heartbeat if the price gets high enough to be painful, of course.
Last edited by Outcast_Searcher on Mon 05 Feb 2018, 23:28:49, edited 1 time in total.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: Effects of rising oil prices on the economy

Unread postby Outcast_Searcher » Mon 05 Feb 2018, 23:27:11

GHung wrote:After 2008, consumption dropped significantly until QE and ZIRP kicked in, which is about the time oil prices jumped up as consumption began to rise. Hard to determine true cause and effect when markets and consumer confidence are being manipulated to such an extent.

Ah yes, that strawman again. If you don't like what the markets tell you or if you don't understand it, then blame the big "manipulation conspiracy", those shadowy figures that invisibly "manipulate" the markets in ways you dislike so.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: Effects of rising oil prices on the economy

Unread postby Darian S » Mon 05 Feb 2018, 23:45:02

Outcast_Searcher wrote:
GoghGoner wrote:Here is the latest from the IEA that explicitly states that demand is affected by price. That is econ 101, rockdoc.

Maybe before trying to pontificate about economics, have the first clue about it?

First, they're talking about reduced demand growth, not reduced demand.

Econ 101 also teaches about inelastic demand. That's oil products like gasoline for the consumer. For the driving people really need to do (go to work, the store, etc), demand is HIGHLY inelastic because people feel they NEED that transport fuel to get by. So even if you triple the gasoline price or multiply it by ten, in the short term, people will generally drive enough to get to work and the grocery store etc. Optional driving can dry up in a heartbeat if the price gets high enough to be painful, of course.


Except that cuts consumption which lowers sales which results in layoffs and stores closing. The unemployed often cant afford much gas.
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Re: Effects of rising oil prices on the economy

Unread postby Darian S » Mon 05 Feb 2018, 23:50:50

Outcast_Searcher wrote:
GHung wrote:After 2008, consumption dropped significantly until QE and ZIRP kicked in, which is about the time oil prices jumped up as consumption began to rise. Hard to determine true cause and effect when markets and consumer confidence are being manipulated to such an extent.

Ah yes, that strawman again. If you don't like what the markets tell you or if you don't understand it, then blame the big "manipulation conspiracy", those shadowy figures that invisibly "manipulate" the markets in ways you dislike so.


Debt is up pretty much everywhere. Underemployment is rising. People are one check loss or emergency away from bankruptcy. The auto sales are down, phone sales are down, the retail apocalypse is going down. Exxon mobil failed to meet expectations despite rise of oil prices and has had to borrow to pay dividends.

That the global economy is stressed is evident. Spiralling debt is a sign that the can was kicked because the world could not afford.
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