Economic Policy vs. the Energy Economy
May 11th, 2009Posted by: Roger Pielke, Jr.
The FT’s Lex column provides a helpful reminder about the relative magnitude of economic policy instruments in comparison to the global energy economy:
The credit crunch may have sparked the crisis. But it was arguably high oil prices that first pushed the world towards recession by helping to trigger the US slowdown in December 2007. By the same token, the fall in oil prices has now helped the world economy back to its feet. Government handouts are peanuts by comparison.
Look at the sums. Last year, oil prices averaged $100 a barrel. As the world was then consuming some 88m barrels of crude a day, that amounted to a total annualised cost of $3,200bn. The subsequent collapse in crude prices has cut this year’s average by half, to $50, generating an annualised saving of $1,600bn.
Compare that to what governments have pledged to spend. Excluding bank bail-outs, the International Monetary Fund estimates the discretionary fiscal stimulus provided by G20 countries this year and next will total 2.7 per cent of combined gross domestic product. As G20 output is about $45,000bn, this is equivalent to $1,200bn. That is three-quarters of the help that lower oil prices have provided in one year alone. Oil exporters such as the Organisation of the Petroleum Exporting Countries, which accounts for 40 per cent of output, should take a short bow.
May 11th, 2009 at 8:27 am
And what do Exxon and Saudi Arabia et al do with the money they got when oil prices were high? It doesn’t go under a mattress. Some of it, not sure how much, does get recycled into the global economy. As such, the trillions that you describe as going for expensive oil do not just disappear.
The stimulus was dealing with money that did disappear from economic activity because those who “make” that money (banks) weren’t doing so.
I’m not saying that there was no oil factor, just that calculating the difference in what was spent on it is not the same as the impact on economic activity. I think that the huge trade deficit that the US has been running for decades plays a role here as it means that whatever percentage of oil money that does get into the global economy, less of it gets into the US economy, because people elsewhere don’t buy as much from us as we buy from them. Which is why I think that dealing with the structural trade deficit is important to long-term economic health. And I don’t see very many politicians from either political party addressing this.
May 11th, 2009 at 8:36 am
Economist James Hamilton’s perspective:
http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2009_spring_bpea_papers/2009_spring_bpea_hamilton.pdf
May 11th, 2009 at 2:24 pm
It was redistribution of wealth from consumer nations to producer nations. Since consumer nations are made up of mostly the G8 who buy durable goods and the like from the developing world it had a negative impact on the global economy. Exxon and the like did make enormous profits by corporate standards but they are dwarfed by the national oil companies.
Hamiltons paper falls short. In the real world no refinery was on the brink of shutting down because of lack of supply. Exxon and other oil execs testified there was shortage of supply. Evidence of this can be seen in what happened to the price of gasoline in the USA as crude rose. Refinerers were unable to pass on the increases and began to lose money. Gasoline demand was nose diving long before the July peak of 150/bbl. The price of crude then declined sharply. This sharp decline in crude and preceding decline of demand of finished product undermines his inelasticity theory. If finish product had remained high $ then demand would have fell further. The early 1980’s are a better case study on elasticity.