Oil 1 Peak Oil 21


US Economy – Foreign Investors



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US Economy – Foreign Investors


Rising oil prices drive away foreign investors and decrease economic growth
Joseph Braml, editor-in-chief of Yearbook on International Relations at the German Council on Foreign Relations, 2007

Project Muse, Can the United States Shed Its Oil Addiction? The Washington Quarterly 30.4 (2007) 117-130


The price for imports of crude oil has increased markedly since 2003, but demand has not waned in response. Due to higher oil prices, energy imports added about $70 billion to the U.S. trade deficit in 2005 and $50 billion in 2006.25 They currently account for roughly one-third of the current trade imbalance. In the summer of 2005, Federal Reserve Board Chairman Alan Greenspan warned Congress that increased energy prices since the end of 2003 diminished U.S. economic growth by about one-half of a percentage point in gross domestic product in 2004 and by three-fourths of a point in 2005.26 High energy prices hurt energy-intensive sectors of the economy and have trickle-down effects on other sectors as well. Consumers have been hurt by rises in fuel prices. Feeling their reduced purchasing power, they cut back on spending, thus diminishing economic growth from the demand side. In a May 2007 poll, two-thirds of Americans reported that they have been affected financially in some meaningful way by higher gas prices. For 18 percent, it created a financial hardship, and an additional 49 percent indicated that high gas prices caused them to adjust their usual spending and saving habits in significant ways. Lower-income households and middle-income families have been especially affected.27 If consumer spending falters and business becomes more cautious about expanding, reassessing the profitability of investment projects in light of higher energy costs, the United States might slide into a recession, which would cause higher unemployment and slow private spending even further. Signals of a weakening U.S. economy may prevent trading partners from reinvesting their returns in the United States. If U.S. productivity and economic power were seriously questioned, investors might seek different havens to get a better return on their investments. This would put the U.S. economy under considerable strain and put the dollar in doubt as a safe harbor currency.


Housing market collapse undermines foreign investment and corporate spending
Nouriel Roubini, chairman of RGE Monitor and professor of economics at New York University, April 2008

Proquest, The Coming Financial PANDEMIC, Foreign Policy, Iss. 165; pg. 44


FINANCIAL CONFIDENCE WILL FALTER: The fallout from the U.S. subprime meltdown has already festered into a broader and more severe liquidity and credit crunch on Wall Street. That, in turn, has spilled over to financial markets in other parts of the world. This financial contagion is impossible to contain. A huge portion of the risky, radioactive U.S. securities that have now collapsed-such as the now disgraced residential mortgage-backed securities and collateralized debt obligations-were sold to foreign investors. That's why financial losses from defaulting mortgages in American cities such as Cleveland, Las Vegas, and Phoenix are now showing up in Australia and Europe, even in small villages in Norway. Consumer confidence outside the United States-especially in Europe and Japan-was never strong; it can only become weaker as an onslaught of lousy economic news in the United States dampens the spirits of consumers worldwide. And as losses on their U.S. operations hit their books, large multinational firms may decide to cut back new spending on factories and machines not just in the United States but everywhere. European corporations will be hit especially hard, as they depend on bank lending more than American firms do. The emerging global credit crunch will limit their ability to produce, hire, and invest.

US Economy – Expert Consensus


Experts agree high energy prices slow down the US economy
Jad Mouawad, masters degree in political science from the Institut d’Etudes Politiques de Paris, 1-24-08

Wider Troubles Trickle Down to Oil Sector, New York Times, http://www.nytimes.com/2008/01/24/business/worldbusiness/24oil.html?pagewanted=print


Experts are concerned that high energy prices could begin to weigh more heavily on the economy now that lower growth appears to be at hand. On a visit to Cairo on Wednesday, Samuel W. Bodman, the United States energy secretary, told reporters that high prices were starting to hurt the American economy. “The economy has been able to withstand it until now,” Mr. Bodman said. “I believe the $100 price of oil is starting to have an impact.” For the moment, the economic slowdown has yet to translate into a significant drop in oil consumption. Barclays Capital analysts, for example, noted that in China refineries were increasing diesel imports to address severe supply shortages. The analysts say that a series of factors that have pushed up prices in recent years are still in play: commercial oil inventories in industrial nations are lower than their five-year average, new production growth from non-OPEC producers is weak, and slower economic growth means that OPEC nations have little incentive to increase production.

US Economy – Consumer Spending


Persistent high oil prices undermines consumer spending on other goods
Nouriel Roubini, professor of economics @ NYU and Brad Setser, Research Associate, Global Economic Governance Programme, Oxford, August 2004

http://pages.stern.nyu.edu/~nroubini/papers/OilShockRoubiniSetser.pdf, The effects of the recent oil price shock

on the U.S. and global economy
However, there are reasons to believe that economists may be underestimating the likely growth effects of the latest oil shock. Indeed, both in 1990 and 2000, most economists argued that the oil shock would not lead to a recession and yet a recession did occur, as higher oil combined with falling equity prices and a change in business and consumer confidence. The reasons for concern are as follows: - First, “animal spirits” (effects on consumer and business confidence) matter when one considers the effects of oil prices. In 1990, some called the recession the “CNN recession” as consumers worried about the war and the oil price shock stayed at home watching news on the Gulf situation and the war rather than going out and spending their income on consumption. Consumer spending has been driving the American economy; high oil might lead the American consumer to pull back. Indeed, recent data suggest that this is exactly what happened in the second quarter. Also, uncertainty about the future price of oil could impact business confidence and real investment (as it did in the first quarter of 2003 right before the Iraqi war). - Second, households are highly leveraged with high debt burdens (and rising debt service burdens once interest rates start to rise); given low household savings, they cannot react to the shock to their real income from higher oil prices by further reducing savings to keep real consumption on other goods constant. Higher gas prices may mean less spending on other goods.

US Economy – Alt Energy Solves


Alternative energy use is essential to offsetting the trade deficit
James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08

http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204


Over the long run, a sustained increase in the prices of energy imports will permanently increase the nation’s merchandise trade deficit, although some of this impact could be offset if some of the dollars are returned to the U.S. economy through increased purchases of U.S. goods and services or through purchases of such other assets as securities or U.S. businesses. Some of the return in dollars likely will come through sovereign wealth funds (SWFs), or funds controlled and managed by foreign governments, as foreign exchange reserves boost the dollar holdings of such funds. Such investments likely will add to concerns about the national security implications of foreign acquisitions of U.S. firms, especially by foreign governments, and to concerns about the growing share of outstanding U.S. Treasury securities that are owned by foreigners. Over the long-run it is possible for the economy to adjust to the higher prices of energy imports by improving its energy efficiency, finding alternative sources of energy, or searching out additional supplies of energy. There may well be increased pressure applied to Congress to assist in this process.

US Economy – A2 Monetary Policy Solves


Impending economic downturn can’t be curbed by monetary policy
Hillard G. Huntington, Director Energy Modeling Forum Stanford University, 10-3-05

http://www.stanford.edu/group/EMF/publications/doc/EMFSR9.pdf, The Economic Consequences of Higher Crude Oil Prices, Final Report, EMF SR 9


A “perfect storm” may unfold in the future when oil price shocks happen as the fiscal and trade deficits worsen and interest and inflation rates move higher. These conditions would complicate considerably any government response for offsetting the impacts.


US Economy – A2 Housing


Housing market is improving– increased housing starts, building permits and construction
Bloomberg News, 7-17-08

http://www.bloomberg.com/apps/news?pid=20601068&sid=acA6Eu60VaLI&refer=home, U.S. Economy: Home Construction Hits 17-Year Low (Update2)


Total housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May. Economists forecast a 960,000 reading in June, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey. A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said. Building permits rose 11.6 percent to a 1.091 million rate in June. Excluding multifamily applications in the Northeast, permits would have risen 0.7 percent. Work on single-family homes decreased 5.3 percent, bringing it to the lowest level since January 1991, Commerce said. Construction of multifamily homes, such as townhouses and apartment buildings, jumped 43 percent to an annual rate of 419,000 in June, led by a 242 percent surge in the Northeast. Starts fell in two of four regions, led by an 11 percent drop in the Midwest.


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