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$1.80 petrol = recession

Written By: - Date published: 8:42 am, March 14th, 2011 - 51 comments
Categories: Economy, energy - Tags: , ,

So, the other day I was arguing something around $100 a barrel oil equals a global recession. I wanted to get more precise: is there a certain price of petrol in New Zealand, above which the economy goes into recession? It turns out there is, and we’re well above it. The political implication: the best way to promote growth is decrease our oil dependence.

I took the MED’s petrol data and got the average price for 91 in each quarter since they started publishing the numbers in 2004, inflation-adjusted, and compared it to the GDP growth rate. The link was strongest when I lagged the petrol price by a quarter, which makes sense because it takes time for changes in petrol price to change consumer behaviour and other prices.

The key price appears to be between $1.75 a litre and $1.80 a litre.

As you can see, the prices we’ve experienced recently suggest that there will be recession in the December through to June quarters, even without the Christchurch Earthquakes and the fallout from the Sendai Earthquake (which will be significant). And recession will continue until (if) the petrol price gets down to a viable price.

This is a scatter graph, each dot represents a quarter giving the growth rate and lagged petrol price.

The formula for the trend line crosses zero at $1.77. Of the 8 quarters in which petrol has averaged over $1.77, 5 were followed by a quarter of recession and the other 3 were followed quarters with 0.1% growth. Of the 17 quarters where petrol was below $1.77, the economy shrank once in the following quarter, was flat once, and grew 15 times. The correlation is -0.71, which is strong.

Although there’s not a lot of talk about this in the msm, I think it’s pretty obvious that the price of petrol can induce recessions at what, now, seems like quite a low level. The average household consumes 35 litres of petrol and a couple of diesel every week. That means a 10 cent a litre rise sucks $200 per year out of the average household budget and $300 million out of the total budget of households. That means $300 million less consumer demand for other things, meaning less economic activity. $300 million is 0.15% of GDP, so that’s a guide to the direct hit to the economy from every 10 cent petrol rise without even counting the extra cost of freight transport, which probably doubles the effect since as much imported oil is used for diesel as petrol. It doesn’t take too much to work out that when you keep taking 0.15-0.3% off GDP with every 10 cent rise you reach a point that outweighs ‘normal’ growth.

Now, a petrol price of $1.77 equates to an oil price of about USD$80 a barrel. Anyone expecting oil to go down below $80 and stay there in the future? Nah, me neither.

A pro-growth political party should pay attention to this. They can’t influence petrol prices (apart from unsustainably cutting tax every time they rise, and that just necessitates rising tax elsewhere) but they can help households and freight companies consume less of it, which means the economic damage of a price rise is decreased.

A pro-growth party in the age of peak oil should concentrating their efforts on providing alternatives to oil and decreasing dependency on oil. And there’s an obvious suite of policies for that: no more motorways, more public transport, rail and coastal shipping to replace freight, ending sprawl and creating walkable communities.

Huh. Somewhat ironic that ACT, the most growth opposed party, is resorting to race-baiting while that the Greens have the most pro-growth economic policy.

51 comments on “$1.80 petrol = recession”

  1. Bunji 1

    And the government’s plan? From Stuff this morning:
    Doubt stalls biofuel growth

    Biofuel producers say millions of dollars worth of investment is at risk because of uncertainty over whether the government will continue a subsidy programme beyond next year.

    and the result of that and similar policies:
    Economy ‘probably back in recession’

    • ZeeBop 1.1

      Biofuels just keep the lifestyle alive a bit longer, when it should be helped to die.
      Government should not be building more roads, it should be buying up useless
      unwanted noisy poorly maintained old road vehicles and recycling them for scrap.
      This is what a sustainable resilient government would look like, one that promotes
      the recycling and entrenches the new energy efficient economy with relevant policies.
      Another question can you sue the local school if their parents turn up in horrendously
      noisy cars every morning? Its like a rally just before 9am every morning now.

      • Bored 1.1.1

        When I used to cycle to school back in the Jurassic I was in no danger of being flattened by “mummy” dropping off the kids at school in a 4WD.

        • Shane Gallagher 1.1.1.1

          You are right – the most dangerous drivers around schools are parents driving SUVs at speed, double parking and generally putting everyone else’s child in danger so they don’t have to get out of their cars.

          With zoning in towns most people live well within walking distance of school and that is how kids should be getting there. At my son’s primary school they are not allowed to cycle or scoot to school as the roads are too dangerous. The sad thing is that the school is right.

          • Rosy 1.1.1.1.1

            Could ease in gently with a 500m parking-free zone and large pedestrian/cycle zones around peimary schools.

            • Lanthanide 1.1.1.1.1.1

              You’d never get a parking-free zone around a school, there’s be massive outcry from the parents. That, and parking isn’t so much the problem it’s the dropping off/picking up where cars are stopped for 2-3 minutes at the most.

  2. Bored 2

    Marty, nice article, nothing I disagree with in terms of interpretation. I am going to sound llike a tired record BUT “growth” is at the core of the problem. In reality if the economy is linked to energy prices then we will have to cope with permanent decline. In which case we should best work out a new way of measuring economic activity and outcomes.

    • ZeeBop 2.1

      Growth isn’t the problem, growth is change, which is the solution. What we need is more growth not less, a different kind of growth, inward growth, organic growth, less is more growth, concentrated growth, not sprawl growth, not lavish growth, not out growths, not more of the same growth we cannot afford.

      • Bored 2.1.1

        Z, you may be right, after all anything you do that produces an outcome could be described as growth. Where it gets interesting is that measuring the aggregate of all of these actions might indicate a decline using current measures. The reason I say this is that “cheap” energy has been a major input in most outputs that have been measured in aggregate as growth. Take away “cheap” energy and the equation changes. Which means that how we measure the “transformative growths” you mention becomes a key issue.

      • Shane Gallagher 2.1.2

        Z – I think you may be confusing “growth” with “development”. Our economy is caught in a boom/bust cycle because is relies totally on growth to remain stable. The second the economy starts to slow down the very things that drive growth then drive collapse (capital flow, efficiency and employment).

        So if we actually want to move to something equitable then we need to move to a steady state economy or zero-growth economy. This doesn’t mean it is stagnant – it is just that we design an economy that is sustainable and doesn’t crucially rely on growth to remain stable. That zero growth economy can develop all it likes as long as it is sustainable and doesn’t affect the ability of the economy to give everyone the necessities of life (secure housing, a job, education, health care etc… ). It is a new concept to be sure – but we cannot grow much more simply because we are running out of everything – land, clean water, energy supplies… To think that we can grow forever is simple insanity.

        • Lanthanide 2.1.2.1

          Everyone keeps saying “zero-growth, sustainable economy” but I’ve never seen what that actually means in practical reality. Nor anyone seriously proposing a model that would work.

          It’s a bit like the 40% CO2 reduction by 2020 campaign. They had stickers and slogans, but I bet a lot of people inside the campaign, let alone people they sucked into it, actually knew the implications of what they were suggesting. Which would be along the lines of ‘petrol priced at $4/l to reduce consumption’ amongst other things.

          • Bored 2.1.2.1.1

            LAN, what it means is the economics of true cost and sustainability. It means that the environmental costs are quantifiable, as are all externalities, and consequently are a recognised chargeable economic cost. It means that finite resources are recognised and managed around. It means that resources that have to be managed, such as fish stocks are managed sustainably. It means recognising the limits of growth and being able to stop over reach. It means a huge challenge because we have never done it before and because we now have to.

            I dont think we will ever get rid of the profit motive, or the individual desire to have more. That seems to be an inate human characteristic. The question becomes how do we prevent our own excesses, or direct them for the common good?

            • Lanthanide 2.1.2.1.1.1

              Ok, that makes more sense. But I think you’re striving for an unachievable goal. Our stock markets do not reach their theoretical efficiency because the are information deficits in the market. That’s with something that humans are completely in control of, and we still can’t manage it. To expect we could price in the costs for damaging the environment (when it is so complex – just look at climate change) is really unbelievable. I think if we did truly cost in the price of everything, we’d end up with no economy at all because almost anything we do harms the environment in some way or another.

              Probably the most sustainable society I can think of off the top of my head would be the Native Americans. But look that their population density compared to modern society, as well as their level of development and pure ‘roughing it’ that they lived with.

              • lprent

                I don’t think that they were paricularly sustainable either. The levels of mass extinctions went up with the population there. There is a lot of argument about how the megafauna there diminished so rapidly after the arrival of humans.

                • ZeeBop

                  Species that understand entropy are better fitted. If your species just mixes all your plastics and glass, etc, into a landfill all you get is some out gasing that you can burn off. Species that survive for the long haul keep low entropy lifestyles. You could say they are thrifty, you may get a run of high entropic exuburance from a low entropy source off fuel that has been baking in the crust for a couple of million years but it runs out. In fact species leave their wasting of resources to mating displays, maxing out in a lavish sports car on the open road should be done a couple of times in a life time not every weekend. The human race is deformed, it spends resource in inane repetitive bouts of mating displays.

                  • M

                    ‘In fact species leave their wasting of resources to mating displays, maxing out in a lavish sports car on the open road should be done a couple of times in a life time not every weekend. The human race is deformed, it spends resource in inane repetitive bouts of mating displays.’

                    Absolutely on the nail ZB.

                    Maybe I’m weird amongst my female cohorts but the thought of some guy trying to impress me with a car is a massive turn-off because my thought patterns automatically go to the resource waste and environmental damage. On the other hand if he rides a bike, walks or gets the bus, yeah, it does it for me.

              • Bored

                Lan, it might come down to things like having to balance a houses useful life span and utility with the ability and timespan to grow the materials…zero ecological balance plus labour.

                Your expectations about no economy if we priced in the cost of damaging the environment is a dilemna. We cant have an economy as we know it today without wrecking the environment: ergo to have the economy we have today we must wreck the environment: end result no environment, no economy. You better believe it.

        • Pete 2.1.2.2

          – but we cannot grow much more simply because we are running out of everything – land, clean water, energy supplies… To think that we can grow forever is simple insanity.

          Something we don’t seem to be running out of is insanity. Don’t you know, before there is nothing left we will have invented something else to run out of.

          • Afewknowthetruth 2.1.2.2.1

            The difference between genius and stupidity is that genius has limits. -Einstein

      • Draco T Bastard 2.1.3

        Nope, as much as economists have tried to explain that their version of the word growth is different from everybody else’s it’s still whether the GDP increased or not that is the measure. A recession is defined by two consecutive quarters with flat or negative GDP growth. What we need is development which comes from research. Make no mistake – the present system is all about financial growth, making rich people richer and not development which makes a community better.

        • Bored 2.1.3.1

          Dont you just love economist lingo.

          Depression = recession
          Big depression = double dip recession
          Equilibrium = flat growth
          Contraction = negative growth
          Watering down of money = financial growth

  3. Sanctuary 3

    Bill English believes the market fairies will save us –

    http://www.bettertransport.org.nz/2011/03/government-has-no-plan-for-high-oil-prices/

    Gareth Hughes: Will the Minister finally support an inquiry into how New Zealand can best protect its economy from high oil prices?

    Hon BILL ENGLISH: Probably not. When we talk about strategies to deal with high oil prices, we see that the fact is that the best strategy is for people to see the price signals and change their behaviour accordingly…

    This is not a policy or a strategy. It is gross and utterly irresponsible wishful thinking from a dogmatic idiot. Such comments might be unsurprising at the ACT party conference, but from the deputy prime minister they represent a total dereliction of duty.

    • Bored 3.1

      Such comments might be unsurprising at the ACT party conference…the natural home of Boag and Kerr and a whole bunch of “business” types advocating the free market. Follow the money, who funds the National Party? English may be the piper but who is paying for the tune?

      • ChrisH 3.1.1

        I agree. Somebody owes somebody something, or else they wouldn’t have handed Rodney Auckland on a plate to trash.

  4. Michael 4

    GDP is inflation adjusted, petrol prices are not. Perhaps you would get a more valid graph by inflation adjusting petrol prices, but I suspect the resulting graph would have a slightly lower correlation.

    • Marty G 4.1

      As you should have read in the post, I did inflation-adjust the petrol prices.

      So there goes that weak attempt at rebuttal. Pretty strong correlation, eh?

      • Shane Gallagher 4.1.1

        Excellent analysis btw Marty!

        • Uroskin 4.1.1.1

          So if the Government reduced the excise on petrol so the price never rises above $1.75 we’re sweet?

          Captcha: move

          • Blighty 4.1.1.1.1

            the govt would just have to raise the money from households some other way, so the drain on consumer demand would be the same.

            • Colonial Viper 4.1.1.1.1.1

              Not if the households being taxed most were the top 5% in terms of incomes/assets: effect on consumer demand would be negligible. Maybe the V6 Beemer would get sold instead of the V8, not a biggie.

  5. Afewknowthetruth 5

    The price of fuel is very liekly to drop in the short term; the chaos in Japan will almost certainly put fear back into ‘the markets’ and is very likely to cause international oil prices to plummet.

    All that will do is prolong the delusion that the oil-based economy has a future, of course.

    Marty G does some very worthwile analysis but he keeps messing up his articles with nonsense like this: ‘providing alternatives to oil ‘.

    And the constant banter about GDP is utterly tiresome. GDP is at the heart of our problems. If we actually want progress we need to use GPI, not GDP..

    I don’t know how many times it has to be said, ten times, a hundred times, a thousand times, ten thousand times: THERE ARE NO ALTERNATIVES TO OIL

    Nothing on this planet is available anything like the quantity (80+ million barrels a day) of oil, has anything approaching the EROEI of oil (currently around 10:1 and falling), or has the energy density of oil. No substance or system of production of anything stacks up as a replacement for oil. This has been demonstrated over and over again by people like Pimmnetel and Fridley …. and people take absolutely no notice.

    The fact is we are rapidly approaching the crash and burn stage (2012-2015) of this global industrial civilisation and 99% of the populace remain oblivious.

    Pretty scary really.

    • Bored 5.1

      AFKTT. Its beat your head against a brick wall, been saying this for years and you wont get thanked. There are some big troubles out there. My prediction is that Saudi Quattros (dromedaries) will again be in vogue in Riyaz within the next 20 years, but the sesame seeds will be in short supply becuse it will be to hot to grow them.

      The only thing we can really do is build our alternative skills and networks. NZ could in effect be a safe port in a storm, I would not hang my hat on the ability of the institutions of the status quo to moor us there.

      • Afewknowthetruth 5.1.1

        Bored.

        I know. Telling the truth is just a hobby now. People do not want to know the truth: they prefer the delusions that correspond with the narrative of empire and consumption of their own support life systems -well in the short term they do. Once it all turns to custard they will be complaining bitterly that nobody warned them it was all unsustainable and about to collapse.

        Regarding change to a more sane way of living, it just will not happen voluntarily. All the systems -central government, local government, policial parties, laws, courts, police, schools, technical instiutions, mainstream media, the AA, sports clubs etc. are geared to protecting and promoting the status quo of industrial empire via ignorance, misinfomration or outright deceit. That is why ‘crash and burn’ looks to be inevitable, I’m afraid.

        People will change their lifestyles because they won’t have the money to buy fuel or groceries, not because they want to change.

        By the way I have already been presented with a ‘Brick Wall Award’.

        • Bored 5.1.1.1

          I had a good laugh at Victorian Farm on TV a month or so ago…the men had a need to transport something. They went to the stables, walked past the tractor (cart horse), rejecting it as too big for the job, and hitched up the quad bike (donkey)….My point is that the solutions to most requirements are well known and often may not require complex industrial society and technology. As you say the real issue is the institutions that cannot envisage things differently or reach backward for alternatives.

          Whats a Brick Wall Award? Who kindly donated it?

          PS Please accept the award for clear sightedness: A Cassandra (bit like a lead plated Oscar).

          • Afewknowthetruth 5.1.1.1.1

            BWA ‘It is better ti bang yiur head against a brick wall than not bang yoiur head against a brick wall’. I was given it for for writng Ten Things Everyone Ought To Know. Presented by a group of aware people in Wellington.

            Yes, Cassandra’s god-given gift was foresight. And her god-given curse was not to be believed.

        • RedLogix 5.1.1.2

          Everytime I see the wankers on Top Gear doing absurd power slides in grossly over-powered cars, literally burning up fuel and rubber at a rate of dollars per second… I cannot but help think petrol is still too cheap.

          • Bored 5.1.1.2.1

            Red, given half a chance I would do it too, looks like fun. Therein lies the problem, its so hard to resist and not do the things we know we should not do, but love to do anyway.

          • M 5.1.1.2.2

            ‘Fraid Top Gear is the ultimate dick compensator show presented by a bunch of buffoons having their last gasp of machismo before the jaws of death come to claim them.

  6. nadis 6

    I’ve seen some investment bank research which suggests that globally, when oil as a share of global GDP hits 5.5% that triggers an impact on growth. At the moment 5.5% equates to $120 a barrel on their metrics. So on a brent = 1/3, wti = 2/3 split oil right now is about $102 but I’d guess oil price should be measured as a quarterly or longer average rather than a point estimate.

    I would guesstimate that NZ has a higher sensitivity to oil prices than say the US as our labour and capital productivity is so much lower.

  7. This 27 page booklet http://oilcrash.com/articles/wilson08.htm is currently being posted to every politician, most mayors of ‘large’ towns, most heads of govt departments, and most ‘department’ heads at Vic Uni.
    I’m sure most copies will end up in the bin.

    • RedLogix 7.1

      Well written and to the point Robert. I think any thoughtful person would know that the world as we know it must come to an end.

      Look on the bright side, maybe most copies will get recycled.

      • Robert Atack 7.1.1

        NB thanks to Derek and his efforts, he is doing all the work on this one.

      • The Baron 7.1.2

        Sorry guys, I reached the completely opposite conclusion. This will be thrown out because it takes 27 pages, with no evidence apart from the author’s passionate prose, to make points that could be made far better.
        Your challenge is the same as that that every activist faces – how to get these people pay attention and take or change their actions.
        Sending a rambly 27 page personal treatise, then lambasting them for not reading it, is not likely to be a winning strategy.

        • Draco T Bastard 7.1.2.1

          So I take it that you completely missed the 2 or 3 pages of references at the bottom?

          Th only reason you reached the “completely opposite conclusion” is because you just don’t want to believe the reality.

        • RedLogix 7.1.2.2

          This will be thrown out because it takes 27 pages, with no evidence apart from the author’s passionate prose, to make points that could be made far better.

          If you had actually read the document, you would have known that it was full of quotes from numerous luminaries… used directly as evidence.

          • Bored 7.1.2.2.1

            I think the Baron may be right that the document will be thrown out: not for the reason he says but for the reasons that his type of thinking and persona represent. None so blind as those who dont want to see, none so deaf as those who dont want to hear.

  8. Steve Withers 8

    I had a discussion about Peak Oil with Tau Henare via Twitter. It went on across a couple of weeks. At first he hadn’t really heard of it at all (this is a month or so ago)….and after a couple of weeks he finished by likening peak oil to alien invasion and consigned it to the tin hat brigade.

    I think that sums up the attitude of the Multi-National Party at this point to the long term implications of oil becoming more expensive. They so far see no problem, their heads apparently being firmly inserted into the topsoil as they are on so many issues. At the very least, they appear to assume the market will sort it out by rewarding and encouraging the development of various technologies that will allow life as we know it to continue more or less without changing. They are, in effect, relying on a faith system to deliver the solution to all the problems…and they don’t pick winners.

    This is clearly not a prudent party with an eye to risk. Religion, market-based or otherwise, is no substitute for prudent planning and preparation.

    Again, we see this Multi-National party government is reckless with our resources.

    • Pete 8.1

      Concerns about running out of finite resources and polluting the planet haven’t just happened in the last couple of years. Has any government anywhere in the world ever addressed this properly yet? Can it be addressed soon enough or by enough to make any difference? Or is it a non-stop juggernaut? Reminds me of some Jethro…

      He hears the silence howling —
      Catches angels as they fall.
      And the all-time winner
      Has got him by the balls.
      He picks up Gideon’s Bible —
      Open at page one —
      God stole the handle and
      The train won’t stop going —
      No way to slow down.

  9. Steve Withers 9

    The challenge, as always, is to make the blind see and the deaf hear. There are keys to unlock these access ports to their minds…..we just have to work out what they are. Being conservatives, it tends be WHO says something rather than the validity of what is being said. That is why people are that way. They lack the ability or the confidence to direct their own minds to a problem…and instead rely on “authorities”. At the oppositie end of the scale is the sort people who join the Greens…who define themselves by independently exercising their curiosity and drawing their own conclusions about what they find. IMHO, this is why the Greens are so fiercely democratic internally while the National Party has very little in the way of ACTUAL internal democracy.

    • Bored 9.1

      Interesting observation on conservatives relying upon who said it…thought about people I know and it rings so true. I my case these are the ones who want the gossip and scandal but have no idea about the issues. The TV reporter wearing shorts actually knows what he is talking about because he is a TV reporter. It must be true.

      Wonder if the corollary of Greens reacting with independent curiosity will be conservatives running for an authority figure to save them (regardless of whether that person is rational / knows anything etc)?

  10. exit lane 10

    fits with what history tells us … Ten of the last 11 recessions were preceded by oil price hikes.
    http://reason.com/archives/2011/03/08/oil-price-shocks-and-the-reces

    and the effect of higher oil prices on NZ GDP and household spending is to take billions from our economy and wallets
    http://oilshockhorrorprobe.blogspot.com/2011/03/earthquake-nz5-billion-oil-quake-more.html

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