Oil 1 Peak Oil 21
US Economy – Inflation + Growth
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- US Economy – Inflation + Growth
- US Economy – Stagflation
US Economy – Inflation + GrowthRising oil prices stop economic growth and cause inflation Alessandro Cologni, fellow IMT Institute for Advanced Studies, and Matteo Manera, professor Department of Statistics, University of Milan-Bicocca, May 2008 Elsevier, Science Direct, Energy Economics Volume 30, Issue 3, Pages 856-888 Sharp increases in the price of oil are generally acknowledged to have important effects on both economic activity and macroeconomic policy. In particular, the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries. Thus, not surprisingly, a considerable body of economic research has studied the channels through which oil price shocks influence economic variables. Several economists have offered a number of theoretical explanations to account for the inverse relationship between oil price changes and the level of economic activity. The most intuitive justification is that oil price shocks are indicative of the increased scarcity of energy. Because high energy costs lower firms’ profits they, normally reduce the willingness to purchase new capital goods; however, if the increase in energy prices looks to be permanent, firms might decide that it makes sense for them to invest in more energy-efficient capital, moderating the decline in their capital spending. Hence, in the long-run high energy costs may induce firms to reduce their investment in new capital or cause the existing capital stock to become economically and technically obsolescent. Therefore, there could be a reduction of the productive capacity of the economy of industrialized countries. Moreover, if consumers expect a temporary rise in energy prices, they could decide to save less or borrow more, causing a fall in real balances and a further increase in the price level. Another channel through which oil price shocks could influence economic activity is the income transfer from oil importing countries to oil-exporting nations. Rising oil prices can be thought as a tax levied from oil-exporting countries to oil-consumers. In the long-run, although the resulting reduction in domestic demand should be partly offset by the export demand from the foreign recipients of the income transfer, nonetheless, in net terms, there will be a negative impact on the consumer demand for goods produced in the oil importing nations. In the short-run, however, consumers may be reluctant to cut non-energy spending below accustomed level, leading them to reduce saving rather than spending. A third explanation is related to the concept of ‘real balance’ effect. Increases in oil prices not only slow economic growth, but also cause inflation to increase. Higher prices for crude are followed, almost immediately, by increases of oil products, such as gasoline and heating oil, used by consumers. Moreover, since, people may try to substitute oil with other forms of energy the price of these alternative energy sources could increase as well. In addition to this direct effect on inflation, there could be an indirect effect due to the behavioral responses of firms and workers (second round effects). While the formers could pass on their increased costs of production in the form of higher consumer prices for non-energy goods or service, the latter could respond to the increase in the cost of living by demanding higher wages. In this case, a reduction in real money balances has negative effects on household wealth and, consequently, on consumption and output. Moreover, there will be a ‘liquidity preference’ effect, as people tend to rebalance their portfolios towards liquidity. If the monetary authorities fail to meet growing money demand with an increased money supply, real balances will decrease and interest rates will increase. US Economy – Inflation + GrowthElevated oil prices are driving massive inflation through price increases risking a deep recession Dean Calbreath, financial columnist, 7-16-08 http://www.signonsandiego.com/news/metro/20080716-9999-lz1n16economy.html, '70s flashback would be bad trip for economy, San Diego Union-Tribune Today, oil threatens to bring stagflation back to life. With fuel prices surging, the official U.S. inflation rate hovers around 4 percent. Some market analysts say inflation could top 6 percent by the end of the year. “The outlook for the rest of 2008 and early 2009 is darkening, not least because of the seemingly relentless rise in commodity prices,” said Nigel Gault, chief economist at the Global Insight research firm. “We now expect oil, food and raw-materials costs to keep rising through the middle of 2009.” Although Gault's prediction of a 6 percent inflation rate sounds low compared with early 1980, when inflation peaked above 14 percent, keep in mind that in the early 1970s, a rate of just 4 percent seemed so intolerably high that President Nixon imposed wage and price controls. Once Nixon relaxed those controls, pent-up demand and an OPEC embargo pushed inflation through the roof. Moreover, some economists say that if the government counted inflation the way it did in the 1970s and 1980s – before government economists changed their calculations for measuring price increases – it already would be as high as 7 percent to 10 percent. If gasoline rises to $7 per gallon, it could push the official inflation rate into the double digits, through price increases on food and a wide variety of other goods as well as fuel. For now, inflation is largely contained within food and energy prices. But the cost of fuel also will drive up business costs, especially if workers start pressing for higher salaries to make up for the money they are spending at supermarkets and gas stations. That could create the type of 1970s inflationary snowball that prompted Federal Reserve Chairman Paul Volcker to start jacking up interest rates, pushing the federal funds rate to a high of 20 percent in June 1981. Volcker quashed inflation, but he also threw the economy into a deep recession. US Economy – Inflation + GrowthRising oil prices curb growth and contribute to inflation Sandrine Lardic, EconomiX-CNRS, University of Paris and Valérie Mignon, CEPII, Paris, May 2008 Elsevier, Science Direct, Oil prices and economic activity: An asymmetric cointegration approach, Energy Economics 30 (2008) 847–855 Oil prices may have an impact on economic activity through various transmission channels. First, there is the classic supply-side effect according to which rising oil prices are indicative of the reduced availability of a basic input to production, leading to a reduction of potential output (see, among others, Barro, 1984; Brown and Yücel, 1999; Abel and Bernanke, 2001). Consequently, there is a rise in cost production, and the growth of output and productivity are slowed. Second, an increase of oil prices deteriorates terms of trade for oil-importing countries (see Dohner, 1981). Thus, there is a wealth transfer from oil-importing countries to oil-exporting ones, leading to a fall of the purchasing power of firms and households in oil-importing countries. Third, according to the real balance effect (Pierce and Enzler, 1974; Mork, 1994), an increase in oil prices would lead to increase money demand. Due to the failure of monetary authorities to meet growing money demand with increased supply, there is a rise of interest rates and a retard in economic growth (for a detailed discussion on the impact of monetary policy, see Brown and Yücel, 2002). Fourth, a rise in oil prices generates inflation. The latter can be accompanied by indirect effects, called second round effects, given rise to price–wages loops. Fifth, an oil price increase may have a negative effect on consumption, investment and stock prices. Consumption is affected through its positive relation with disposable income, and investment by increasing firms’ costs. Sixth, if the oil price increase is long-lasting, it can give rise to a change in the production structure and have an impact on unemployment. Indeed, a rise in oil prices diminishes the rentability of sectors that are oil-intensive and can incite firms to adopt and construct new production methods that are less intensive in oil inputs. This change generates capital and labor reallocations across sectors that can affect unemployment in the long run (Loungani, 1986). For all these reasons, oil prices can affect economic activity. US Economy – StagflationContinued high oil prices are creating stagflation in the US 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
http://www.iie.com/publications/papers/paper.cfm?ResearchID=222, The Risks Ahead for the World Economy, The situation would be still worse if future increases in energy prices and the budget deficit compound such developments, as they surely could. The negative impact would also be much greater in other countries because of their need to generate larger and faster domestic demand increases in order to offset declining trade surpluses. Fears of a hard landing for the dollar and the world economy are of course not new. The situation is much more ominous today, however, because of the record current account deficits and international debt, and the high probability of further rapid increases in both. The potential escalation of oil prices suggests a parallel with the dollar declines of the 1970s, which were associated with stagflation, rather than the 1980s, when a sharp fall in energy costs and inflation cushioned dollar depreciation (but still produced higher interest rates and Black Monday for the stock market). Paul Volcker, former chairman of the Federal Reserve, predicts with 75 percent probability a sharp fall in the dollar within five years. Directory: file -> view view -> Western Europe after wwii view -> Author study: paul fleischman view -> Qpa1 7ela study Guide view -> Arctic Oil/Gas Neg view -> November 1970 Approximately 150,000-500,000 deaths Bhola Cyclone Bangladesh view -> Grade Level: 6 Unit of Study: Caribbean glce view -> Citation: Duffield, Katy view -> Table of Contents Lesson # view -> Chinese Wind Energy Disad Download 9.54 Mb. Share with your friends:
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