NYT: An Oil Shock That Could Be an Economic Stimulus in Disguise

[DeepModem Mom]

An Oil Shock That Could Be an Economic Stimulus in Disguise
By EDUARDO PORTER

Published: August 21, 2004


How much will expensive oil hurt?

Over the last 30 years, the United States has been driven into recession three times by abrupt surges in the price of oil. As the price of crude has surged over the last two weeks, reaching new heights almost daily, some economists have begun to worry that the current "oil shock" will slam the brakes on the nation's economic expansion again.

It probably won't. Despite the disquieting parallels with the oil shocks of the 1970's, the 1980's and the 1990's, the impact of the current oil spike on the American economy is likely to be much less intense than in previous surges.

Not only is the economy much more energy-efficient - gasoline prices have been stable in recent weeks - but, more important, in contrast to previous periods when oil shocks occurred, inflation remains under control. So rather than pushing up interest rates and compounding the economic slowdown, rising energy prices today are slowing the rise of interest rates, providing an unexpected dollop of economic stimulus on the side.

"The past oil shocks gave the economy a one-two big punch," said Ethan Harris, Lehman Brothers' chief economist. "This time it's more like little jabs."...


http://www.nytimes.com/2004/08/21/business/21oil.html


LINK TO DU DISCUSSION OF WP ARTICLE YESTERDAY, "'Oil Shock' Worries Some Economists" ("economy near tipping point")

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x764480

[Dogmudgeon]

1. And there's more here --

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=104x2245224

--bkl

[Tight_rope]

2. Kick...I was saying this just the other day...

[NewHampshireDem]

3. Bull ... The article says nothing about the impact of home heating oil

In my area, home heating oil is up about 50% from last year, and nearly double the price of two years ago, selling at about $1.50 per gallon.

I forsee the "perfect storm" of high heating oil prices, high gasoline prices, and declining consumer confidence/increasing fears of unemployment as all having a major impact on the Christmas shopping season.

This will be an exacerbation of already weak sales in the discount retail area--Wal-Mart's gains were considerably less than analysists predicted in July, and the retail sector has taken a hit on Wall Street lately (ignore K-Mart's gains, which are due to its emergence from bankrupcy rather than any strength in the sector).

If we have a cold winter here in the Northeast, the economy is going to get a lot worse before it gets better.

[BlueCollar]

4. And Jet fuel oil prices

are about to deep six a couple of major airlines and some smaller startups...followed by a major crash in airline pension contributions where the PBGIC may be underfunded...not a pretty picture

[ozymandius]

15. Which airlines are threatened? n/t

[BlueCollar]

24. usairways is on the brink

ual is next

[reprobate]

21. Some of us predicted a year ago that the airlines would destruct.

Not only is their profit and loss inversely proportional to the cost of fuel, they are about the MOST inefficient means of transportation that exists today.

While the rest of the world is introducing three hundred mile an hour mag-lev trains that are as fast as airlines and orders of magnitude more fuel efficient, we prefer to subsidize the dynosaur. Boy, aint preditory capitalism great?

[trof]

5. Whistling in the dark.

In the fairly recent past, gasoline prices have risen within days of increases in the price of oil. But not his time. Hmmm...

Could Bush*s big-donor oil companies be holding the pump price down until Nov. 3? I look for $3-$4 dollar-a-gallon gas within a week of the election.

[NewHampshireDem]

6. Don't expect it to last long ...

http://www.suntimes.com/output/business/cst-nws-oil21.html

Gas prices have gone the opposite direction from crude because refiners -- taking advantage of the high prices this spring and early summer -- ramped up production to 95 percent of capacity and greater. Imports of gasoline also increased.

At the same time, demand turned out to be lower than forecast and inventories increased significantly, analysts said.

[Purrfessor]

23. Think of holding down pump prices as a campaign contribution.

At some point the GOP will wise up as to how they can repay companies that hold down prices: Create a new tax deduction that gives companies the right to deduct the difference between the lower price of the product versus the price they could have charged had they allowed the price to rise in accordance with, in this case, the rising cost of oil.

[TahitiNut]

7. This is just another 'supply-side' delusion, imho.

The corporate money machines are tuned (due to equity market ratio assessments) to generate profits as a percentage of gross revenues. When costs escalate, prices and production levels are adjusted (increased prices and lowered production) to achieve the target percentages. This typically results in an overall gross-up of profits, again at the expense of labor.

Whenever the cost of a basic commodity increases, the number of consumers who're priced out of the market increases as well. Increased fossil fuel costs have collateral damage at the lowest end of the market: the poor. In a country like the US which has public transit systems that don't qualify it to be compared to other industrialized countries with far more extensive public transportation infrastructure investments, this merely immobilizes the 'have-nots.' This is just more socialization of costs and privatization of profits.

[ozymandius]

12. Regressive taxation, as comparison.

Basic costs have continued to rise as the economic divide has spread between rich and poor. While there are more people struggling, living on teh edge now than there were four years ago, a simple ten cent increase in the cost of a gallon of gas erodes the overall spending power of America's majority and growing population.

Another de-merit to the central message of this article: the writer assumes that further homeowner indebtedness is a good thing. While interest rates may remain lower longer - real income is not realized when a stimulus is premised on borrowing, with interest.

[ozymandius]

8. Misleading headline - where's the stimulus?

This is really poorly written. The reporter and editor should be ashamed of themselves.

Take this paragraph where any form of stimulus is mentioned (buried near the end of the article):

Yet this time prices are not soaring. Overall consumer prices in July were only 3 percent higher than a year earlier, and prices excluding energy and food rose only 1.8 percent. This has allowed long-term interest rates to decline, as investors have concluded that higher energy costs are likely to slow the Fed's hand in raising short-term rates; not speed it.

This is the catalyst for a stimulus? This is nuts. Even the reporter says that the CPI excludes energy and food. Transportation costs for food are affected by oil prices. The reporter seems to say that stock market housing futures will be positively impacted by rising oil costs because the Fed will slow the rise in interest rates. Take this paragraph:

Low interest rates, in turn, have provided an unexpected stimulus to household borrowing - the main economic fuel of the last three years - and given a big boost to construction and housing. In the week ended on Aug. 13, the Mortgage Bankers Association's mortgage index jumped 11 percent from the week before, and the refinancing index soared 21 percent. Housing starts surged 8.3 percent in July.

The reporter does not seem to take into account the last minute fence-sitters who contributed to the surge in borrowing. Interest rates were about to rise. So these people hopped off the fence and submitted their mortgage applications and re-fis. The cost of fuel represents a tiny component of their decision to apply for mortgages.

Housing stocks do not fairly represent current economic conditions because they are, ny nature, futures. Therefore, they are speculative. Considering the leading economic indicators that have been conveniently omitted in this article - the stock market does not fairly represent the health of the overall economy. This is a common fallacy.

Stimulus? Mr. Porter only seems to say that oil prices have sent currents through the economy. The currents are just not as big as one might have assumed they would be. This evidence does not present a valid argument for a hidden economic stimulus.

[WhereIsMyFreedom]

25. I found his reasoning to be loopy as well

:crazy: The Feds will slow the rising of short-term rates to counteract the downward pressure rising oil costs have. He gets the cause and effect backwards.

[wishlist]

9. His rosy scenario spin sounds a bit premature- market cheerleading?

since it is entirely based on the July CPI report showing no inflation and the fact that interest rates have not gone up much yet. Interest rates were not raised by the fed until just a few weeks ago last month and again this month. Several prior CPI reports this year have indicated some inflation and everyone I know has been shocked over the sharp jump in the past 2 months in prices for groceries and home heating oil and medical costs etc (and gas went back up several cents this week in my area) The author sounds like a stock market cheerleader doing his best to prop up investing.

No question that if oil price increase is the result of over-reaction and manipulation, it could drop sharply before the full impact hits, but that is anyone's guess. I love it though how yesterday it was considered good news that the oil price ended under $49 at the same time that news reports predicted a sharp rise soon in gas prices.

[ozymandius]

14. This article represents the propgation of a myth.

The myth being that the stock market is the economy. It is not. Bush did the same thing in 2002 when the Dow went below 9k, then rose again. He* said about rising stock prices, "The economy's looking up." Well - we saw another year of our country hemmorhaging jobs.

Many people believe that overvaluation of some stocks mixed with stock values among companies that are actually doing well is indicative of the our collective fiscal health. It is not. This economic snapshot is focused on an ivory tower point-of-view: There's the stock market (ivory tower); And then there's everything else.

[screembloodymurder]

10. Idiots !

The well off always underestimate the pain of the poor. When you're well off, paying a little more for energy is an inconvienence. When you're poor, it's a decision between food and heat.

[BiggJawn]

11. Yeah, I noticed pump prices didn't follow crude oil spikes....

And I said "What's up with this? Usually, crude goes up 50 cents and gas goes up a dime..."

But they had that "refinery fire" in Indiana and prices went up at week's end. I saw $2.03 in Michigan yesterday and $1.94 in Indiana where it was $1.75 last week.

And we have gotten to that point where we now say "WOW! $1.65 a gallon! Let's go home and get all the Jerry cans and fill 'em!"

[ozymandius]

13. There's a lag time between crude prices and gas prices.

The lag time is commonly 60 to 90 days. This means that gas prices will be topping out come November 2 based on the current crude oil prices.

[TahitiNut]

16. That's why they're called "futures."

It's the derivatives market ... only slightly more regulated than the derivatives in which Enron dealt.

[BiggJawn]

18. Yeah, Yeah, I know a little of that "Economics" stuff...

I also know that "The Juice" get more and less valuable while it sits in the storage tank at the Gas N' Gulp down the street.

So the crude always goes up 60 days prior to a holiday weekend? I don't think so.
Price spikes at the pump nozzle are more speculation and gouging and "What the Market will Bear", IMO.

[xchrom]

17. nyt delves into fictional literature.

the impact this will have on an already debt heavy country will be significant.

[Fovea]

19. Listen to me, you Soma popping delusional shills!

You can't dress this up. It is either a top to bottom redesign of the world economy, or it is the crash of all crashes, followed by a top to bottom redesign of the world economy around sustainable energy, mfg, and transportation. There is no third way anymore. It went down the tubes with the conservation movement of the 70's.

The real difference is will you re-assign American wealth to rebuilding America (and providing models for the rest of the world)or let it crash and burn (and end up against the wall).

[BrendaStarr]

20. Is this guy dumb or pro-Bush

I'm talking about the writer of the New York Times article, not anyone at DU.

The poster that suggests that Bush buddies could be holding down the price of gas may have the best response.

I wouldn't believe a business writer for the NY Times could be so poor in the remembering and reasoning department, but I've seen itm lots of times before, and it is the weekend.

It has been shown that the rising cost of oil has been offset by refinery improvements or at least that is the spin.

I hope the Bush people are not so powerful they can keep the lid on the gas prices till we vote, but then look what they did in 2000 pushing up the prices during the fall election period.

Inflation in check? First of all that could be influenced by Bush buddies too. (In fact, Al Greenspan, a very pro Bush influence has his finger on the powerful fed rate button and has used it repeatedly since 1999.) Also though, inflation follows and is hard to tame except by extreme measures that hurt you and I more than the rich.

Economy more efficient? How many SUVs do you pass each day?

Sometimes it seems that half the cars on the road are the big hogs.

That article is just another professional news writer's attempt at cute-astute journalism.

[reprobate]

22. Eduardo Porter, you are a whore.

And judging by your sack of quarters, you are a two bit whore in addition.

[better2know]

26. what makes this so funny

if you go back to reply number 1
(thanks for the props BareKnuckledLiberal!)

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=104x2245224

I actually tracked this guy down.
He's been getting in lots of hot water for months ago when he
was writing about the holes in the economic "recovery".
He probably said "here's the pro-bush economy piece you wanted to see" after he put together the weakest possible argument.

He is no whore!
He is apparently one slick dude!

[DeepModem Mom]

27. Good work, better2know! Interesting....

[GOPAgainstGW]

28. Article is Total GOP Driven Garbage.

What a bunch of total election year BS!!

Send Ethan Harris and the author to Bush "Family Fun" Iraq for a year and then see what they have to say!