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