You will see more shills, paid mouthpieces, Keynesian economists and central banker puppets writing articles about $4 a gallon gas not having a negative impact on the economy. They need to do this because QE to infinity will raise the price of oil, food, and everything associated with these two minor expenses. They will provide false storylines about cars being more fuel efficient. An article in my paper claimed the strong vehicle sales in September were due to people buying small fuel efficient cars. It’s complete bullshit. The strong vehicle sales are due to subprime 7 year 0% loans being shelled out by Ally Financial and the rest of the Wall Street scum banks. And Americans are buying SUVs and pickups, not hybrids and Chevy Volts. Gail Tverberg clearly destroys this storyline and accurately points out that stimulus has not solved anything, while driving oil prices higher. When oil prices are driven higher by QE, the people who spend the money in this economy are hurt and the economy goes back into the dumper.
Can an Economy Learn to Live with Increasingly High Oil Prices?
Prof. James Hamilton of University of California recently wrote a post called Thresholds in the economic effects of oil prices. In it, he concludes
As U.S. retail gasoline prices once again near $4.00 a gallon, does this pose a threat to the economy and President Obama’s prospects for re-election? My answer is no.
He looks at a variety of data to come to this conclusion: Fuel economy of cars sold in since October 2007; longer term vehicle miles traveled; monthly car and light truck sales since 2006; and consumer sentiment by month.
I don’t agree with Hamilton’s analysis. As I see it, increasingly high oil prices weaken an economy because they reduce discretionary spending and indirectly cause people to be laid-off from work. They have many other adverse effects as well–they tend to raise food prices, with similar effect. The laid-off workers require unemployment compensation payments, and the same time they are contributing less tax revenue. All of this creates a huge imbalance between revenue collected by governments and expenditures paid out. If oil prices rise again, it will tend to make the imbalance worse.
An economy such as the United States can cover up the problems caused by high oil prices with variety of financial techniques. In my view, high consumer confidence measures the success of those cover-ups, more than it measures the actual underlying situation. One way the US government has managed to cover up how badly the economy is being hurt by high oil prices is by spending far more than the government takes in as revenue. This has happened continuously since late 2008, with outgo exceeding income by more than 50% each year, even though the country is supposedly not in recession.
Figure 1. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). Amounts include off-budget spending, such as Social Security and Medicare, in addition to on-budget spending. *2012 is estimated. http://www.whitehouse.gov/omb/budget/Historicals
The amount consumers have available to spend on cars and gasoline is very much affected by deficit spending. With deficit spending, government employment can remain high and transfer payments can continue, without anyone really “paying” for these costs, putting more money into the economy to spend on oil and cars.
There are other government programs as well. Interest rates on homes and new cars are being kept at record lows, leaving consumers with more money to spend on cars and gasoline. Low interest rates and low taxes also stimulate employers to hire more employees. Quantitative easing helps contribute to higher stock market prices, and makes it easier for the federal government to keep adding large amount of debt.
To me, the fact that the economy is not currently completely “in the tank” speaks more to the success of stimulus programs than having anything to do with adaptation to higher price levels. Countries such as Greece, Spain and Italy do not have the luxury of being able to hide the impacts of their high cost of oil. They are doing less well financially, but were not included in Hamilton’s analysis.
Easy to Overestimate Impact of Recent Changes in Vehicles
With vehicles, we are dealing with a mixture of vehicles of all ages. The average age of automobiles is now estimated to be 10.8 years. The average age of trucks is no doubt greater. The EIA provides a summary of average fuel economy by type of vehicle based on US Federal Highway Administration Data, summarized in Figure 2.
Figure 2. US Motor Vehicle Average Fuel Economy based on US Federal Highway Administration Data (Based on EIA Annual Energy Review, Table 2.8) SW = Short Wheelbase; LW = Long Wheelbase
This data is only through 2010. While it shows some improvement in efficiency of light duty short wheelbase vehicles, it shows little improvement in efficiency overall. The big increases in efficiency were in the period between 1973 and 1991.
The mix of cars by type is concerning.
Figure 3. Automobiles as percentage of total registered vehicles, based on data of the Federal Highway Administration.
The percentage of automobiles has been dropping, as the number of SUV and trucks has been rising. The change between 2008 and 2010 reflects the fact that the number of “automobile” registrations dropped by 4.5% in that time-period, while the number of other (larger) vehicles rose slightly. Thus, the long-term trend to relatively more of the larger vehicles continued. Obviously, this data doesn’t show carpooling and other adaptations, but it is difficult to see any recent big trend toward efficiency.
Can the Economy Weather another Rise to $4.00 Gasoline?
The question of whether the economy can weather $4.00 gasoline, to me, depends on the issue of whether the US government can keep coming up with more manipulations to hide its financial problems.
The US economy started to run into severe headwinds about the year 2001. This is when the percentage of Americans with jobs started falling.
Figure 4. US Number Employed / Population, where US Number Employed is Total Non-Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. (This includes children and others not usually in the labor force.) 2012 is a partial year estimate.
While economists don’t seem to attribute past economic growth to increasing employment percentages, it seems logical to believe they played a role in the long-term growth in the 1960 to 2000 period. The economic growth came not just from the work these employees did themselves, but from the fossil fuels they used on the job. The wages the employees obtained for doing the work allowed the workers to buy products others had made. The long-term growth in non-farm employment between 1960 and 2000 was enabled by increased productivity in the agricultural sector, which was also fueled by increasing use of fossil fuels.
The percentage of the US population with jobs started falling starting in 2001. This is very close to the time when the US started importing far more goods from China, India, and the rest of Asia. If we look at energy consumption for China, we see a sharp increase in energy consumption about 2002:
Figure 5. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.
We can also look at broader groupings of energy consumption, and see a similar pattern:
Figure 6. Energy Consumption Divided among three parts of the world: (1) The combination of the European Union-27, USA, and Japan, (2) The Former Soviet Union, and (3) The Rest of the World, based on data from BP’s 2012 Statistical Review of World Energy.
The cost of goods produced in Asia is cheaper for two reasons: (1) They tend to use a lot of coal in their energy mix, keeping energy costs down. (2) Wages are far lower. One reason wages can be lower is because of the warmer climate.
It seems to be an article of faith of economists today that the US economy and the European economies will return to growth. Then the stimulus can be removed, and everyone can live happily ever after. But is this really something we should be expecting? We really have two kinds of headwinds: (1) higher oil prices, and (2) cheaper competition for jobs from Asia and other developing countries.
As far back as 2001, we read about Greenspan stimulating the economy by lowering interest rates. Various other approaches were used as well, including encouraging more home ownership through subprime loans in the 2002 to 2006 period. The greater demand for homes helped create jobs in the construction industry and helped raise home prices. By refinancing their homes, consumers were able to have funds for purchases they could not otherwise afford. In recent years, we have added a whole list of new stimulus approaches.
I would ask: Aren’t we kidding ourselves if we think a small increase in miles per gallons on new cars is going to fix the problem of another upward bounce in oil prices? Aren’t there some much more basic issues “out there” that need to be fixed as well? Aren’t we fighting two kinds of downside risks to the economy with increasing stimulus, and only marginal success? If oil prices rise some more, aren’t we likely to need “more stimulus”? Where would it possibly come from?
harry p. says:
Cue the keynesians but dont forget that uber dipshit O’Reilly blaming the evil speculators…
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3rd October 2012 at 7:59 pm
Stan says:
Obama will lower gas prices in his 2nd term. He feels our pain.
Romney don’t feel our pain.
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3rd October 2012 at 8:12 pm
Jackson, who's envious but would be haughty if he were richer, says:
It looks like the Wall Street scum bankers and the coupon clipping elite are doing quite well. The stock market was up again today and a news story reported that thousands of millionaires recently enriched themselves with unemployment checks. For the rest of us, we can hope that a bit of the bailout riches, a portion of the stock market profits, and a whiff of the wealth trickles down to us. I think it’s the best we can expect in the George W. Obamney economy.
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3rd October 2012 at 8:34 pm
Romneybama says:
Jackson, you ain’t gettin’ no fucking whiff, no damn bailout money, and you sure as hell won’t see no friggin’ profit, either. All that shit is for me and my cronies. So quit whining. Suck it up, you pussy.
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3rd October 2012 at 8:43 pm
Administrator says:
Jackson
Don’t worry. The higher oil and food prices will only impact the 80%. The stock market surge will benefit the smart people in the 5%.
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3rd October 2012 at 8:44 pm
AWD says:
Great article.
We’ve managed to run Iran into hyperinflation, the currency is worth 30-50% less EACH MONTH. A view of what will happen here pretty soon. Takes time for inflation/hyperinflation to kick in, but once it does, there’s no stopping it.
Maybe China will return the favor (as an Iranian ally), and dump our T-bills, making our currency equally worthless. Either way, how can we avoid a massive conflict with China over the remaining oil in the world? Too many American men with small peckers that must drive pick-up trucks to compensate. Recession or depression, the Chinese want OUR oil. We must put a stop to it.
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3rd October 2012 at 9:03 pm
Stan says:
The Ayatollah ain’t gonna like us no more!
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3rd October 2012 at 9:30 pm
Dave Doe says:
We have enough coal and shale oil to run on for 300 years and at today’s price for a barrel of crude they’re all economically viable. Whose blocking their use – yep – the federal goobermint.
Why – well the ecological terrorist think they only way they’ll force us onto “clean” energy is to deny us the easier and cheaper options. The fact that we may end up cold and in the dark hasn’t crossed their minds. I say we disconnect them from the grid first.
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3rd October 2012 at 10:43 pm
Dave Doe says:
Jim,
That pie chart looks depressing similar to the serfdom experienced in europe during the land baron years.
The solution to this used to be a highly progressive (punitive) tax code. But, 30 years of Laffer’s trickle down has given us the most unequal society ever. Eventually this will lead to civil unrest.
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3rd October 2012 at 10:46 pm
Ron says:
My small town has knothing but big gas guzzling pickup trucks.And none of the local jobs pay anything.The gas in town is 3.99 right now.I dont know how people afford the gas to drive these things.
One of my relatives has a four door toyota yaris with an automatic.It averages 44 MPG.My dad tells me about a story of a guy renting one in France with a diesel and averaging over 70 MPG.
When i drove big trucks i always figured all the truckers with big black Peterbuilts bragging over the cb radio about theyre big engine and all the money they made,were small men with even smaller dicks.
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3rd October 2012 at 12:31 am
Bruce says:
I have no issue with those of higher intelligence. For that matter have no issue with those of average or below average intelligence. The problem is that at every intelligence level 80% or more of them are outright fucking morons. Whats interesting is that for some reason the smart guys have the exact same list of excuses as the dumb bastards do. And why do the really smart people lose their keys more than the others?
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3rd October 2012 at 2:01 am
Bruce says:
That last post was supposed to go to the MENSAN thread. Got no good excuses, just a dumb ass moron moment……….oh fuck where are my keys?
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3rd October 2012 at 2:44 am
Jimi d says:
” Dave Doe ” Where on earth did you get a figure of “300 years worth of coal and shale oil” ? That is absolute HOGWASH ! You cannot believe any government distributed or government sponsored information on how much oil, coal, natural gas, etc., is left. You should do your own INTELLIGENT research before you post such bullshit as fact !
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3rd October 2012 at 2:54 am
fred says:
Dave Doe has been drinking the kool aid again. I love when people come out with that figure of 300 years. Just look at the NG plays with shale oil and they’ll give you your answer. A huge drop off in production after a couple of years, and then the companies desperately trying to up the propaganda on how great shale gas is so they can sell the equipment on to some unsuspecting sap like yourself.
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3rd October 2012 at 3:35 am
Anonymous says:
Last time gasoline hit 4 duckies here (Texas) oil was around 140 a barrel, now its 3.50 gallon and a barrel of oil is almost 50 buckos less.
Now, tell me, Bin Banky, how the price o gasoline has not been inflated?
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3rd October 2012 at 9:55 am
Kill Bill says:
KB Above.
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3rd October 2012 at 9:56 am
Kill Bill says:
So we have got more oil from shale.
YIPPIE TY YAY!
It wont make us energy dependent and this drill here, drill now, Caribou Barbie babble, has not made gas prices lower.
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3rd October 2012 at 10:00 am
MENSA says:
Shredding Bruces IQ Test and Membership Form
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3rd October 2012 at 10:04 am
KaD says:
Gas stations in California shutting down due to high prices ($4.90 a gallon) and shortages: http://www.bloomberg.com/news/2012-10-03/california-gas-stations-begin-to-shut-on-record-high-spot-prices.html
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3rd October 2012 at 6:53 pm