Brad DeLong's Semi-Daily Journal: A Weblog

I still think the current soft-spot has more to do with Bush/Greenspan's poorly-structured stimulus than with rising oil prices.

Oil just provides them with a useful political scapegoat.

The Bush/Greenspan stimulus package is responsible, simply because it is not stimulus but a drag on economic performance. The Keynesian approach was proven in error in the 1930s, 1970s, 1980s, and under Bush II. Government deficit spending only raises Resource prices propelling Production Costs upward. Real stimulus comes from a properly balanced tax base and rate distribution producing paid-for infrastructure with Government in fair competition with the Private Sector for Resources. lgl

It isnt so much the day-to-day spot prices, but the forward oil prices that are the real worry.

Here's a useful web lind for forward price curves going out to 2009 or so ...

http://futures.tradingcharts.com/chart/CO/M

It's the spot price, but there's a dropdown button below that lets you get the long-term futures price.

See the Dec 2008 chart ; note how you have to pay today for oil delivered in 4 years ... even then, you havent been able to buy it for cheaper than US$33.

Once you take out time-value of money, there is a lot of money betting that 2008 oil prices wont be lower than US$38.

Needless to say, this means the feedstock for a plastics factory or an airline probably wont be at it's long-run price of about US$20-25 ...

Ian Whitchurch

After hours oil is trading over $50 according to CNN.

The problem is cost and time passing. The longer time that the cost of oil remains at these levels, the more spending is diverted to energy and away from other good and services. The bond market is not telling us to woory about the inflation effect of high energy costs, but to worry about a slowing economy.

I lectured today on the standard Solow growth model, and argued that a big rise in the price of gasoline (50 to 75 dollars per barrel) depreciates the capital stock at a higher rates, resulting in lower K/L, lower Y/L and in the transition, lower (negative?) growth. We'll see.

Does anyone have an estimate of the equivalent tax hike these oil prices correspond to compared, say, to pre-Bush average oil prices, or just to what the oil was one / two or three years ago? I would also like to know what's the estimated effect on national saving and the trade deficit...

What is the average lag between these increases in crude prices and the prices at the pump? Can the dip into the stategic reserves soften these pump increases if it turns out that Bonnie was just blowin in the wind?
Time to load the front lawn up with 45 gallon drums, no?

best casino online
best online casino
blackjack online casino
buy online casino
casino betting online
casino careers online
casino gambling online
casino game online
casino games online
casino games online free
casino online
casino online free
casino online free online casino
casino online gambling
casino online gambling games com
casino online games
casino play for fun online
casinos online
free casino games online
free casino online
free casino online games
free money online casino
free online casino
free online casino bonus
free online casino game
free online casino games
free online casino money
free online casino slots
grand casino online
grand online casino
how to start an online casino
hoyle casino online
internet casino online
largest online casino
las vegas casino online
las vegas online casino
lasseters online casino
lasvegas online casino
lucky jacks online casino guide
lucky nugget online casino
mac online casino
mgm grand online casino
mgm mirage online casino
mgm online casino
new online casino
no download online casino
online casino
online casino affiliate program
online casino american express
online casino betting
online casino black jack
online casino blackjack
online casino bonus
online casino bonuses
online casino business
online casino com
online casino complaints
online casino connection
online casino craps
online casino deals
online casino directory
online casino for sale
online casino fraud
online casino free
online casino free bonus
online casino free cash
online casino free money
online casino gambling
online casino game
online casino games
online casino games free
online casino gaming
online casino guide
online casino law
online casino laws
online casino let it ride
online casino mac
online casino macintosh
online casino marketing
online casino news
online casino no deposit
online casino no download
online casino odds
online casino payouts
online casino paypal
online casino poker
online casino portals
online casino promotion
online casino promotions
online casino rankings
online casino rating
online casino ratings
online casino review
online casino reviews
online casino roulette
online casino scams
online casino slots
online casino software
online casino sport
online casino sport book
online casino sports betting
online casino sportsbook
online casino tips
online casinos
online free casino
online free casino games
online gambling casino
online internet casino
online sportsbook and online casino games
own an online casino
own online casino
own your own online casino
play casino games online
play casino online
river belle online casino
riverbelle online casino
sands online casino
sportsbook online casino
the online casino
top online casino
vegas casino online
vegas online casino
vegas towers online casino internet gambling virtual
www casino online gambling games com

5 card stud
7 card stud
7 card stud hi lo
card game
free texas holdem
free texas holdem poker
holdem poker
internet poker
live poker
multi player poker
omaha hi
omaha hi lo
one on one
online
online poker
Online Poker Games
poker games
texas holdem
texas holdem poker
texasholdem
world poker tour

What impact does higher oil price have on imported mfg goods, especially that coming from China? Chinese factories need to use energy to import raw materials and to turn it into goods. Then they have to export the goods to the US. Clearly rising oil prices increase the price of goods sold in the US at the margin.

Question is, does someone have some numbers on the impact of a sustained oil price of $45 over six months on mfg goods imported into the US?

Since June, high energy prices have been slowly shifting our spending patterns. There is every reason to believe this slow shift will continue. The shift will lower the growth rate of an economy that is already growing too slowly to create enough jobs to make up for the employment losses since 2001. Bond investors have been telling us the slow growth pattern could persist. The Federal Reserve may have made an error in persisting with short term interest rate increases in such an environment. I do not worry about a recession as much as I worry about growth too slow to spur employment.

As to prices, the bond market is telling us inflation will be dampened by slow growth. There should however be a rise in energy related costs to business that will limit profit growth. Also, high energy costs could be a considerable difficulty for lower income households.

The markets-- stocks & bonds-- are treating the higher oil price as a tax on growth and is acting as they expect it to have little or no growth on inflation. Anne is right.

There have been plenty of efforts to explain the slow growth of employment in this cycle. While it started out looking like the recovery of the early 1990s, weak labor market performance has persisted far longer. I wonder whether cost avoidance isn't part of the problem. Firms were overjoyed at the growth of profits, and there was a bout of hiring to show it, but commodity costs of all kinds have risen pretty fast. Between ominous warnings that consumer goods producers have no choice but to pass on increased costs to consumers, and the evident slowdown in consumer demand in September, I wonder what hiring in September, and particularly October, will look like (ex-teacher of course, 'cause we never quite get the seasonals right).

When Bush invaded Iraq for no reason, my GOP father in law rejoiced because "oil will now be cheap!"

The invasion was a bust that is busting our budget.

This is a bonafide disaster of the worst sort. And oil ain't cheap.

KHarris

"There have been plenty of efforts to explain the slow growth of employment in this cycle. While it started out looking like the recovery of the early 1990s, weak labor market performance has persisted far longer. I wonder whether cost avoidance isn't part of the problem."

The sense I have is that cost avoidance is a large part of the problem. Low labor costs are a more important profit driver than high commodity costs limit profits. Profits have been fine, wage and benefits gains are trifling, far too few jobs are being created. The sense of the problem comes to labor cost avoidance.

The insight by KHarris might even suggest that our labor market has taken on aspects of the structural limits of the European Union's labor market.

Firms aren't hiring because they don't need to. Everyone is doing more with less. My suspicion is that during the market run up, the pace of technology investment outpaced the pace of efficient use of technology by a significant margin. When stock prices fell, companies realized that they had a lot of employees they didn't need. I would not expect to see employment levels in manufacturing rebound much even when demand is robust. There will be a delay until manufacturing labor becomes employed more productively elsewhere. I think we are looking at a big shift close up.

Energy prices do indeed suck. I guess the environmentalists are happy, though.

I work at a strategy management consulting firm and I remain amazed (and concerned) at the amount of cost reduction / operational efficiency / "transformation" (read cost cutting, too) work that we are still doing. We are doing some growth strategy work (up from zero two years ago), but not much. This is very unlike other "post"-recession patterns, so I have to agree with the cost avoidance or, more accurately, cost reduction plus limited growth equalling net cost avoidance.

And environmentalists have precisely what to do with high oil prices. Sources please.

Can I expect the usual conservative puke about "if only they would like us drill in the Artic preserve"? Precisely how many weeks of oil would that buy us?

About Arctic Oil:

http://www.solcomhouse.com/anwr.htm

AD

"I work at a strategy management consulting firm and I remain amazed (and concerned) at the amount of cost reduction / operational efficiency / "transformation" (read cost cutting, too) work that we are still doing. We are doing some growth strategy work (up from zero two years ago), but not much. This is very unlike other "post"-recession patterns, so I have to agree with the cost avoidance or, more accurately, cost reduction plus limited growth equalling net cost avoidance."

I thought the labor cost cutting emphasis would not last long into the recovery from recession. Well the recession ended in November 2001, but the cost cutting shows no signs of ebbing.

The Conference Board's headline confidence index hit a 4-month low in September (data reported 10et today), with the background data suggesting the drop was due largely to doubts about the labor market. Energy prices, maybe.

Kosh,

Jason has a point. To the extent that environmentalists understand markets (wasn't it Nixon who said "we're all environmentalists now?"), they should recognize that higher energy costs are, in the first instance, the biggest inhibition to energy use. That in itself is good news for the environment. However, if the policy response is to try to make energy cheaper by lowering environmental standards, then higher energy prices are a mixed environmental blessing.

http://www.morganstanley.com/GEFdata/digests/latest-digest.html

Collision Course
Stephen Roach (Melbourne)

The world economy is on a collision course. The United States -- long the main engine of global growth and finance -- has squandered its domestic saving and is now drawing freely on the rest of the world’s saving pool. East Asian central banks -- especially those in Japan and China -- have become America’s financiers of last resort. But in doing so, they are subjecting their own economies to mounting strains and increasingly serious risk. Breaking points are always tough to pinpoint with any precision. Most serious students of international finance know that these trends are unsustainable. But like any trend that has gone to excess, a group of “new paradigmers” has emerged with a compelling argument as to why these imbalances can persist in perpetuity. That is usually the sign that the denial is about to crack -- possibly sooner rather than later.

Unfortunately, the case for mounting US imbalances is easy to document. Reflecting an unprecedented shortfall of domestic saving -- a net national saving rate that fell to 0.4% in early 2003 and since has rebounded to just 1.9% in mid-2004 -- the US has turned to imported saving in order to finance economic growth. And since it must run external deficits to attract that capital, it should not be surprising that the US current account deficit hit a record 5.7% of GDP in 2Q04. Yes, America has had a current-account problem for quite some time. But there has been an ominous change in the character of these external deficits. For starters, the US current-account deficit is no longer the means by which America funds investment-led growth that drives increases in productive capacity. In 2003, net investment in the business sector -- the portion of capital spending left over after allowing for the replacement of worn-out capacity -- remained an astonishing 60% below levels prevailing in 2000. Meanwhile, the government’s overall saving rate -- federal and state and local units, combined -- went from a surplus of 2.4% in late 2000 to a deficit of 3.1% in mid-2004. Over the same period, overly-extended US consumers have wiped out any vestiges of saving -- taking the personal saving rate down to a rock-bottom 0.6% in July 2004. In short, America is no longer using surplus foreign saving to support “good” growth. Instead, it is currently absorbing about 80% of the world’s surplus saving in order to finance open-ended government budget deficits and the excess spending of American consumers.

The international financial implications of America’s mounting imbalances are equally astonishing. It wasn’t all that long ago that the United States was the world’s largest creditor. In 1980, America’s net international investment position -- the broadest measure of the accumulated claims that the US has on the rest of the world less those that the rest of the world has on the US -- stood at a surplus of $360 billion. By the end of 2003, that surplus had morphed into a deficit of -$2.4 trillion, or 24% of US GDP. This transformation from the world’s largest creditor to the world’s largest debtor is, of course, a direct outgrowth of year after year of ever widening current-account deficits. Moreover, reflecting the particularly sharp widening of America’s current-account deficit in the past year -- an external shortfall of 5.7% at mid-2004 that is already running 1.2 percentage points above the 4.5% gap prevailing at year-end 2003 -- America’s net international indebtedness could easily hit 28% of GDP by the end of this year.

anne, see also:

http://www.americanprogress.org/atf/cf/%7BE9245FE4-9A2B-43C7-A521-5D6FF2E06E03%7D/tdpp.pdf

Very good analysis of the coming debt train wreck.

A current Republican talking point is that liberals and environmentalists are responsible for high oil prices, because they want to protect cuddly wittle animals and won't let the oil companies drill wherever they want to. I assumed that this was the point Jason was trying to make. I apologize if I was mistaken.

I've been wondering how much of an effect high oil prices have on the bond market. Since oil is priced in dollars the Saudi's have to do something with the windfall, so I've read they've been buying bonds.

My back of the envelope figures about $3.5 billion a month in excess cash just for the Saudi's alone. If the other oil producing nations are buying treasury's as well, could that buying be a factor keeping Treasury yields surprisingly low?

Thanks Kosh.

We're using 82 million barrels a day and pumping just over this. There is no spare capacity and demand is rising by at least two million a year. What happens when for the first time ever demand becomes greater than supply ?

Allow me to link to myself... a column on oil at the Center for American Progress.

Let me say: they didn't let me publish my full thinking, which is that the trigger for adjustment will be Asian inflation followed by a withdrawal from the dollar by Asians.

okay, I guess html doesn't work here:

oil column

http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=193687

If you come looking to learn the rules or the basics of texas
holdem, check out our Poker
Basics, or our Texas
Holdem strategy section. You be able to find out both how the game is played,
and how to play the game better.

"Let me say: they didn't let me publish my full thinking, which is that the trigger for adjustment will be Asian inflation followed by a withdrawal from the dollar by Asians."

Please explain the logic chain....

http://www.americanprogress.org/site/pp.asp?c=biJRJ8OVF&b=193687

Oil Price Increases Add to Economic Risks

by Marshall Steinbaum
September 24, 2004

Over the past several months, world oil prices have risen to record levels—over $48 per barrel—due to increasing demand for oil from growing economies, finite production capacity, and especially security problems related to the insurgency in Iraq. In a climate of economic uncertainty, added pressure from oil prices could be a trigger that undermines durable economic growth in the United States.

Already, some sectors are feeling pressure. On Sept. 1, the Big Three auto makers announced plans to scale back production in anticipation of declining demand. Recent bankruptcy filings by large domestic airlines underscore the risk of high oil prices in a shaky economic environment characterized by stagnant incomes, rising healthcare costs, and retirement insecurity.

The added obstacle of record-high long-term oil prices, and in particular, the perceived permanence of price increases, adds to their negative impact and could reverse economic growth trends. The Organization of Petroleum Exporting Countries (OPEC) has no spare capacity, even as oil prices are well above the level that OPEC tries to maintain. A year ago, the government bureau that gathers energy statistics, the Energy Information Agency, issued a mid-range projection for oil of about $27 for 2004. Oil currently costs around $47 per barrel. In a forecast issued in September 2004, the mid-range projection for 2005 was $42. The government’s models factor in short-term price fluctuations; the difference in forecasts between 2004 and 2005 is attributable to data showing the price rise to be permanent: instability in oil-producing regions, demand growth in booming Asian economies, and a global climate of high risk.

Anne,
The story today was that SA was going to increase production. Is this an "open mouth" operation or an open taps operation. Do they or don't they have spare capacity?

"What happens when for the first time ever demand becomes greater than supply ?"

There was a long thread at Kevin Drum's among economists that this was not possible. Demand can never exceed supply. It was hard for me to understand, but I guess the idea is something like the last barrel available gets priced at a million dollars, and is no longer demanded. Pricing always creates an equilibrium.

Those in opposition to that argument said that in the short term, demand is somewhat inelastic, and what happens is stuff like war. And son-of-a-gun, look who has troops in the middle east.

"What happens when for the first time ever demand becomes greater than supply ?"

There was a long thread at Kevin Drum's among economists that this was not possible. Demand can never exceed supply. It was hard for me to understand, but I guess the idea is something like the last barrel available gets priced at a million dollars, and is no longer demanded. Pricing always creates an equilibrium.

Those in opposition to that argument said that in the short term, demand is somewhat inelastic, and what happens is stuff like war. And son-of-a-gun, look who has troops in the middle east.

online poker

Macroeconomics?

Who is going to fund the US deficits? Not OPEC according to this article: "There are dark whispers in oil circles that cartel members, especially Saudi Arabia, want to keep much of their new money out of American banks and markets because of “post September 11th scrutiny. Official statistics on the ownership of American Treasury bills, for example, show that OPEC countries' holdings are around $44 billion, $8 billion less than two years ago." http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=3222581&subjectID=381586&emailauth=%2527%252FU74QLGE%2523%2540XP%250A

After Bretton Woods 2, perhaps the IMF could join with the European Central Bank and move closer to its major shareholders - in Europe.

Today's (September 29) WSJ carries 3 articles on A2 which, read together, show a worrying situation. On the left above the break, oil prices will slow Asian growth considerably, because of the high btu content of output. US hiring will be hit, as managers turn cautious. Below the break, the US trade gap will widen, as oil price push imports up, while greater slowing in growth abroad (on the btu content argument) cools exports. Finally, in the right-hand column, China assures the US it is moving toward a more flexible fx regime, but does not say how soon it will be in place.

The yuan article is a pretty obvious closing of the circle. China is being asked to support US growth at a time when oil is threatening US growth. The problem is, oil is threatening China's growth, too. So China offers comforting words, but won't take action till it can safely do so.

Yesterday's FT reported on a growing struggle between bankers and national politicians. Who should control a key aspect of macroeconomic policy?

The bankers argue for international stability: "Responsibility for the stable euro lies in the hands of the ECB governing council. The ECB is an independent body and independence is a very highly valued good."

The politicians argue for national interest: "Europe's single currency could be managed in a similar manner to the US dollar, where the Treasury speaks about the currency."
http://news.ft.com/cms/s/8a4bb91e-1021-11d9-ba62-00000e2511c8.html