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higher oil prices are normality « Previous | |Next »
June 10, 2008

Nouriel Roubini argued over 18 months ago that three ugly bears – the worst housing recession in decades in the US, a severe credit crunch and financial crisis, and sharply rising oil prices – will stop the economic growth in the US (and the world economy) and that this crunch would lead to a severe recession in the US.

In contrast to those on Wall Street who say the worst is over and the sunshine will return, Roubini says that:

this economic contraction started on the weight of the first two bearish factors; but now with oil well above $130 the final thick nail on the coffin of the US economic expansion has been hammered. The US faces a contracting economy via jobs and a stagflationary shock via oil prices. The sharply rising oil prices mostly swamped the effects of Bush's recent tax rebate and while the rebate is temporary the effects of permanently higher oil prices – let alone further rising ones – are severe.

The rising oil price indicates that Peak Oil is coming, very likely sometime in the next 20 years. Geology ultimately rules, and this will force a major transition in the global economy due to the dramatically higher prices. True, oil price shocks and supply constraints can often be mitigated by temporary decreases in consumption; however, long term price increases resulting from oil peaking will cause more serious impacts. The mitigation of oil shortages (eg., hybrids, increased fuel efficiency, enhanced oil recovery processes, unconventional oil, substitute liquid fuels) will be difficult, time consuming, and expensive.

In this report Robert L. Hirsch says that:

Higher oil prices result in increased costs for the production of goods and services, as well as inflation, unemployment, reduced demand for products other than oil, and lower capital investment. Tax revenues decline and budget deficits increase, driving up interest rates. These effects will be greater the more abrupt and severe the oil price increase and will be exacerbated by the impact on consumer and business confidence. Government policies cannot eliminate the adverse impacts of sudden, severe oil disruptions, but they can minimize them. On the other hand, contradictory monetary and fiscal policies to control inflation can exacerbate recessionary income and unemployment effects.

You can see why the politicians are running scared. Oil is becoming politically hot. Some are even talking in terms of an oil bubble, implying that the bubble will burst and prices will return to normal. Or that the speculators are responsible for the higher oil prices, not the forces of supply and demand. Or that China and India are the problem because of their use of subsidies.

| Posted by Gary Sauer-Thompson at 8:36 AM | | Comments (20)


oil has more than doubled in the past year. How is that a speculatively driven bubble?

Rising oil prices and slowing economic growth are going to play havoc with budget airlines. I guess we leisure travelers will trade down to low cost airlines as prices rise and so we will be forced to pay the increased baggage fees.

Rudd is saying the problem is OPEC and that the blow torch should be applied to them. What does he mean? That Bush jets over and sorts the bad Arabs out so the good guys in the West can have more oil to run their SUV's?

Isn't this about market forces?

Look the alternative are expensive, but they are there and the high prices will speed it all up. There is no doubt peek oil will happen and no doubt that at the moment every one will believe it has happened. This is not the end of the carbon economy, global warming will still be the curse that brings that about.

We have just had housing bubble, we now have oil bubble. If your a speculator late to the party it will end badly, if your in and now getting out you will make your quick buck.

The rebates are stupid policy. And have had no effect. They were political.

The US govt printing money and pursuing inflationary policies is also a contributor in the US to high oil prices. It is a union of bad policy. Ritholtz has a funny take on it where doing the opposite in policy would have been better.

so we have Brumby in Victoria and Rudd both giving $35 million to help Toyota to build a hybrid car in Altona, Victoria, despite Toyota having decided to do it already. Toyota Australia has said it would have gone ahead without the $70million cash injection, which was not critical to the proposal.

Rudd says that the money was part of his policy approach to promote innovation and research and development, help motorists cope with fuel costs and tackle climate change by reducing carbon emissions. Yet Toyota says that all the engine components imported complete from Japan ready to drop into the car. It's an assembly plant.

The industry is calling for lots more in the way of government subsidy. The secretary of the Australian Manufacturing Workers Union's vehicle division, Ian Jones, said the union movement believed the Government should freeze automotive tariffs (scheduled to be cut from 10 to 5 per cent in 2010) for a further 10 years and double the $500 million green car fund. Jones said:

Getting Toyota to manufacture another 10,000 cars locally is a good start and the $500 million green car fund will give the reshaping of the industry a good kick-start, but we are going to need a lot more money than that - we believe more like a billion dollars.

Presumably there are many millions of dollars of additional assistance likely to flow from the Bracks Review - to help reverse the decline of the Australian automotive industry and the loss of thousands of jobs.

Subsidising local manufacturers to produce a green car is going to do little to increase the uptake of hybrids more generally. Why not lower registration, free car parking etc

the car industry in Australia is a protected species. Tariffs, tax breaks and subsidies are used to protect it. And they want even more protection.

It's main problem is that it builds the wrong product: six cylinder, petrol-guzzling family cars.

These green cars, am I right in thinking they run on both petrol and electricity? If so, where does the electricity come from? Coal?

If it does come from coal, why are they called green cars?

Peter, Holden and Ford have given the Au market exactly what it wants; large family cars. They have not been producing the wrong thing. Even now with higher prices Australians are still going to want large family cars. They will find new ways to give the market that with improved gas economy. Same as the US market will adapt to give Americans what they want (SUVs) with better gas mileage.

Gary, I saw that on the auto blogs/sites. The government subsidy is bad policy.

Okay in the past, yes. Things have shifted with the higher price of petrol, which will increase in price. There is an increased shift to smaller more fuel efficient cars amongst consumers in Australia as well as a shift to public transport.

from a battery in the car? Presumably the battery for the electric motor would need recharging-- just like a laptop, Ipod or mobile phone. The recharging will come from mains electricity that is produced by our coal-fired power stations who are determined to stand outside the emissions trading scheme. See here for the cutting edge in hybrid car technology.

The problem for Rudd is that hybrids are going to be made more efficiently and cheaper overseas and so the local assembled product is going to be overpriced. How will they sell that overseas? Or are they just thinking of a small run---10,000--- for the domestic market. That is a niche production line.

All that money just for a car assembly business? How is that making or manufacturing things? Why not ensure that some car part is manufactured in Australia so that Australia is a supply source for Toyota? Isn't the core of manufacturing the supplier industry and not the assembly industry?

The wonderful market doesn't off us much choice in terms of hybrids does it? Only Toyota's Prius hybrid under the luxury car range.

sometimes The Australian just amazes me. I expect it to be anti-Labor. It's conservatism dictates this and it must keep its anti-Labor readership happy. I don't expect nonsense. This is from their editorial on the Toyota's Camry hybrid:

Unfortunately, Kevin Rudd appears destined to relearn the lesson for government, with his wrong-headed industry policy, which includes continued tariff protection and big subsidies for carmakers to build an environmentally focused car that could be imported more cheaply for Australian consumers from elsewhere. The federal Government could secure a much greater national dividend by staying focused on our comparative advantage in mining and doing all it can to remove the physical and regulatory bottlenecks that limit our ability to get our precious wares to the market.

They want Australia to be a quarry for China and a beach for Japan. Since the beach bit is dropping away---and the tourisms cries out for yet more subsidies--- we just have Quarry Australia. So much for the knowledge economy. How clever is that kind of rational economics?

If the point of hybrids is to reduce emissions then coal powered electricity fed batteries don't do it. If the point is to manufacture an Australian one for the Australian market, forget it, imports will be cheaper. If the point is to make a government fleet they'll evenutally end up being sold on at second hand prices, but that doesn't change either the emissions or the cost.

I'm sticking with my first impression. All it will do is impress the old masculine, unionised, blue collar, industrial age hangers on.

The Australian made more of an economic case in an earlier editorial, 'Subsidy for hybrid car is bad economics' on Wednesday. It said this about Rudd's subsidy:

It's a very 1950s view of the world, complete with a government subsidy - in this case $35 million of federal money and $35 million of state money. That's not a great deal in an industry that talks in billions, but Senator Carr and Kevin Rudd are nevertheless asking Australian taxpayers to take the risk, rather than expecting private industry to absorb that risk, which is the way it should be. They harbour the discredited, rather quaint view that Australia would not be a real economy unless the country possessed a motor vehicle manufacturing industry. That's not a good enough reason to subsidise an industry that is being challenged by overseas manufacturers who benefit from cheaper labour costs. That's simply protectionism. In a rational world, car manufacturing would live or die on its ability to compete in a global market. Car workers who lost their jobs could instead become involved in building luxury boats in Queensland or make a very respectable wage in the booming West Australian mining sector. Car manufacturing is not quite yet in the rust-bucket category, but even if it were, there is no earthly reason to prop it up. Directing scarce resources at an ageing industry can only result in poor returns - if not an outright loss.

I love that bit 'In a rational world, car manufacturing would live or die on its ability to compete in a global market' with its touchstone to the actual world we live being measured by the ideal of neoclassical world and coming up short. Why not start with the actual world?

The editorial goes on to say that Rudd's announcement in Tokyo yesterday was a slice of environmental tokenism spiced with an incentive to keep the company happy, all cooked up to mollify the unions at home.

But the price of those 200 jobs comes at a disproportionate cost to the taxpayer and marks an unfortunate return to subsidising an industry that should be able to look after itself.

Funny how similar arguments are not applied to the coal or aluminum industry. Or to the childcare industry. Or to the )(dreary) Australian Literary Review produced by News Ltd. and bundled with The Australian.

The latter has also backed off in saying that the subsidy was not needed because Toyota had already made the decision. Maybe The Australian's hostility---its more News Ltd in general--- is because it is a green car. and a good opportunity to whack greenies for their stupidity.

It seems to me that this really is just more subsidising the motor industry. This is how the motor industry works. Subsidise us or the headlines will be "500 layed off".
Whether the cars are called a Toyota Hybrid or a Toyota Hi ho really makes no difference. People will buy them and the wheel will keep turning.

people who own the Prius are saying that they achieve a 50% reduction in fuel consumption in and around the city though not on trips between cities. Some would find that attractive.

a comment in Crikey says this about hybrid cars :

A hybrid engine like the one currently being used in the Toyota Prius uses a small(er) petrol engine coupled to a battery-powered motor. This electric motor can drive the car by itself under small loads, like in a traffic jam, and then the engine starts up when needed ...The large batteries are then continually recharged by the petrol motor during braking and idling etc.

It seems that the recharge or plugin bit doesn't apply in this case.

I read the same thing moments ago and stand corrected. At that rate they would, as Peter says, make excellent city cars.

an electric car There is a lot of different types to choose from. It highlights the little steps that have been taken in Australia, and just how conservative the car industry is in this country. Industry policy has concentrated on exports of gas guzzlers and not innovation.

Things have changed. For the first time in almost a century, the internal-combustion engine is no longer the default powertrain choice for automakers; true innovation and experimentation, not just continuous refinement and clever marketing, will be the cost of entry into the business.

If you installing solar panels on youir house to charge the Roadster you are close to the idea of getting yours transportation needs free of imported oil.

the subsidy to Toyota is more about maintaining an Australian auto industry than reducing emissions. As Leonore Taylor says in The Australian:

The engine of this policy is an overriding desire to maintain an Australian automotive industry. Open the bonnet and this is old-fashioned industry policy, pure and simple. It's all about the Prime Minister's famous promise to preside over a country that makes things. ...
This is about using $500 million of public funds to turn around an industry fast heading for obsolescence, and to turn it around very fast...
It is about doling out grants for the rapid retooling of the existing Australian car manufacturing operations - hybrid, or petrol, or diesel, or whatever - so that they start producing more fuel-efficient cars in the next couple of years and have some chance of competing in the emerging new markets.

Sounds right to me.