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The Economic Effects of Oil Price Shocks.

By Glenn R. Morton

Copyright 2001

http://home.entouch.net/dmd/oswald.htm

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     “What is black, sticky, comes in large tubs and causes depressions?  No, not Marmite. Here is a string of numbers as a clue: 1974, 1979, 1991, 2000”
     “The answer is oil—and,  more precisely, large rises in the price of oil.” Andrew Oswald, “Oil Price Puts Skids Under Growth,” The Sunday Times, Sept. 2, 2001, p. 4

Thus starts the editorial by this Warwick University economist.  He goes on to puncture some myths about oil which he says George Bush has.

1. While our economies are more efficient than they used to be, we are not less dependent upon oil. Oswald points out that we are not less dependent upon oil but more dependent than any time in history.  We use more energy consuming products than our grandparents did. In the 1960s the world went through 20 million barrels a day, it was 60 million in 1980 and today it exceeds 75 million.

2. The second myth is that oil price rises have minimal effect on jobs or economic growth.  Oswald criticizes Alan Greenspan for increasing American interest rates last year just as the oil-induced recession was beginning to appear. He points out that economic models don’t incorporate oil price but it is the best predictor of what will happen to the economy.

3. This is in my opinion the most wide spread myth. It is that oil prices don’t matter because there are lots of other sources of energy.  Oil price underpins all other energy prices.  While oil price rose 3 times from 1999 to 2000, natural gas rose 50% just this year. 

4. There was no real harm done by last year’s oil price rise. Due to the time it takes for energy prices to work through the economy, it will be early next year before the full effect on employment is felt.

5. The myth that there are plenty of  substitutes for oil is one that the environmental lobby promulgates. Oswald points out that while we might be able to drive solar-powered cars, they can’t take goods and people across the ocean.  There is no substitute for jet fuel.

6. There is nothing to worry about in the long term.  He points out that discoveries of oil do not respond to price, that the US production peaked forever in 1970. And then he points out that when China begins to use automobiles (which it is on the verge of) the demand, and thus the price, for oil will skyrocket. That will certainly cause more recession. 

 What he doesn’t throw into his calculations is that the world is about to peak out production.

reference

http://www.sunday-times.co.uk/news/pages/sti/2001/09/02/stibusecn03002.html