$100 oil spells recession

Written By: - Date published: 1:10 pm, March 11th, 2011 - 17 comments
Categories: energy - Tags:

As we wait to see what Saudi Arabia’s ‘Day of Rage’ will bring and if it will send oil prices into the stratosphere, some economists, including our Reserve Bank Governor, are trying to pretend we’re not in the midst of an oil shock and there is no threat to the economy. They’re dead wrong.

Alan Bollard has shown he has his head firmly in the sand:

“MPs questioned Dr Bollard about the impact of oil price rises, and he said the Reserve Bank was watching the situation closely although it did not think there was a long term problem.”

Oh dear. This is the same mindset that prevailed during the last oil shock. You know, the one that was only three years ago. I can just imagine Bollard’s thinking ‘Hmm. The cost of the energy source that powers our entire transport system and provides 40% of humanity’s energy demand keeps on leaping to economy-crippling prices due to stagnant or falling supply. This is all in line with modeling that has been around for decades, which predicts a cycle of deep recessions separated by only brief interludes of anemic growth. Could this be a long-term problem? Nah.’

Finance Minister Bill English, on the other hand, seems to get that there’s a problem, it’s just he won’t do anything about it:

Gareth Hughes: Does he agree with analysts at Morgan Stanley who say that sharp increases in global oil prices pose the biggest threat to the global economy and that the last five major recessions followed oil price shocks?

Hon BILL ENGLISH: I think we are all concerned about the impact of a sharp rise in oil prices, in terms of both the pressure it could put on households and the way it takes more resources from our economy to keep petrol and diesel running. However, we are resilient. The latest spike is not yet as big a spike as the one experienced in 2008. We have plenty to do to get this economy in better order, but we cannot actually influence the oil prices.

Gareth Hughes: Does he expect—as many commentators expect—that the next decade will see continuing oil price spikes?

Hon BILL ENGLISH: It is possible. That is why, if we are to expect continued instability in oil prices, we need a resilient economy that is able to adapt quickly both in a straight economic sense and in terms of how people live their lives.

Gareth Hughes: Why does New Zealand not have a strategy to reduce our current vulnerability to higher oil prices, as many other countries do?

Hon BILL ENGLISH: People are pretty sensible. When they see prices going up, they start thinking about whether they want to continue with their energy-intensive business or lifestyle. As it happens, over the years New Zealand, as I understand it, has become less energy-intensive in its production, which is a trend that will probably continue if oil prices keep going up.

Gareth Hughes: How is spending $10 billion on new motorways reducing our vulnerability to higher oil prices?

Hon BILL ENGLISH: Spending on the motorways creates a more efficient traffic system whereby commuters get better value out of what they invest in their cars, bus fares, and petrol. We are keen to make sure we finish the current roading infrastructure investment because, despite the earthquake, it is important for New Zealand’s long-term productivity and standard of living.

Bill’s smart enough to see the problem. He’s just not quite at the point where he thinks he ought to stop being part of it and start being part of the solution.

Internationally, economists are starting to acknowledge that the last oil shock caused the last recession. But they’re drawing the wrong lesson. Oil hit $147 US a barrel last time, they say, therefore we don’t have to worry until oil gets up around $150 again.

Actually, oil only touched $147 briefly during one day. The world was driven into recession by lower oil prices than that – around $100 a barrel in the first half of 2008. We’re already at that price again.

Think of the oil price like the brakes on your car. $150 a barrel oil would be like chucking on the handbrake – it would bring you to a screeching halt but it’s not the only way to stop. The high and rising oil prices we’ve experienced for the last two years are like pressing on the brake pedal while trying to accelerate, no wonder the ‘recovery’ was so pathetic. With oil now over $100 a barrel again, we’re paying near-record prices for petrol and it’s like the brake pedal is all the way to the ground.

The world economy simply can’t grow with energy this expensive. If $100 oil was enough to send the world into recession last time, it will only be easier this time with economies already so weak. By December, 6 OECD countries had already started to slip into recession, including us. And that was before the oil price shock really took.

Last March, 4% of world daily GDP was going on getting enough oil, today it’s 5.5% to get the same amount of the stuff. Every time oil has consumed over 5% of world GDP, currently $100 a barrel, there has been a recession.

There’s plenty we can do, like stop spending $10 billion on new highways when traffic is falling. But we need our leaders to stop turning a blind eye to the problem and commit to action.

17 comments on “$100 oil spells recession”

  1. nzP 1

    The words of politicians mean nothing, but you have to be just a little worried about the “let them eat cake” statement here:

    Hon BILL ENGLISH: People are pretty sensible. When they see prices going up, they start thinking about whether they want to continue with their energy-intensive business or lifestyle. As it happens, over the years New Zealand, as I understand it, has become less energy-intensive in its production, which is a trend that will probably continue if oil prices keep going up.

    I had no idea the sensation of hunger was a business function I could opt out of. If food prices go up because of increased fuel costs, if I can’t afford to get to work, just stop “the lifestyle”.

    Note to self: restructure my energy intensive body to run on air and find money tree.

    I think retardation must be a pre-requisite for entering parliament.

    • Kevyn Miller 1.1

      nzP you need to stop wallowing in self pity and start excersing your self determination. You don’t have to be a slave to the food industry. Revolt! Grow your own. Escape the tyrany and walk to work, at least until Key privatises the footpaths. I think retardation must be a pre-requisite for entering a supermarket carpark.

      • Bored 1.1.1

        Kevyn, I am highly admiring of your approach: have actually been growing / catching mine own food for ages. One of the drawbacks is that some things just have to be processed like olive oil etc so its off ot the shop.

        Another issue is limited home garden space. To resolve this use of the footpath and the surrounding long acre as extended gardening space has much to recommend it. Guerilla gardening as an act of civil disobediance, and a challenge to the hegemony of the food processing industry, and perchance a serendipitous gift to your fellow citizen.

  2. Bored 2

    Interesting Marty: it is at moments like this I await the usual denial responders to swing into action: techno cornucopia will save us, or the Rapture will happen so we dont need to care. A giant mutant Space Goat coated in huge quantities of crude oil will crash into the Arizona desert…..

    US$100 plus oil signifies the end of growth across the whole world economy, its because supply has peaked and its only down from here on. To help people come to grips with this from a psychological viewpoint I recommend they listen to Kathy McMahon, a clinical psychologist who doctors to this issue.

    [audio src="http://www.ecoshock.net/eshock10/ES_101029_Show_LoFi.mp3" /]

  3. Lanthanide 3

    “Bill’s smart enough to see the problem. He’s just not quite at the point where he thinks he ought to stop being part of it and start being part of the solution.”

    If you’re not a part of the solution, there’s always money to be made in prolonging the problem.

    • Bored 3.1

      Listen to the link I gave: its not a problem to which there is a solution. Its a dilemna, consequently no solution.

      You are right about making money, it may not be worth much however, and there might be nothing to spend it on.

  4. exit lane 4

    The real kicker from higher oil prices is that they are cutting into our discretionary spending. Figures just done by the NZ Parliamentary Research Unit calculate between $23 million to $33 million of household spending is lost for each $US1 rise in the oil price. That’s over $1 billion NZ effectively disappeared from Kiwi’s wallets since last October. It gets much worse if the NZ dollar drops against the US.

    Also in just 4 months the oil price rises have already sliced close to $2 billion off our GDP. If oil goes to US$160 oil then around $NZ4 billion will be lost. Even more if the NZ dollar falls against the US dollar. see…..

    Why has National (and the previous government) not foreseen the rise in oil prices? – there have been warnings for years that an oil crunch is coming – see this report – again from from our Parliament Research Unit http://bit.ly/htqwGx

    And why is there no plan to lower our dependence on imported oil? Its draining billions from our economy and wallets. Bill English’s “leave it to the market” answer to Gareth Hughe’s question is ideology trumping good economic management – pure and simple. But where is Labour on this? not a peep so far.

  5. Bored 5

    Labour is still entrenched in the same economic paradigm that National are: growth is the only game in their vocabulary. that may be because offering any realsitic response is electoral suicide: it is saying that the party is over as opposed to an open invitation to the party to suck free of charge at the trough. We all want to go to the party, and there will be tears if we cant go.

    • RedLogix 5.1

      Sadly you are right.

      Call it the Top Gear effect if you will.

    • Colonial Viper 5.2

      Don’t worry mate, I’m doing what I can to ‘un-entrench’ them. Tough though. Spoke to an MP not long ago who said he didn’t believe that people would have to stop driving cars any time in the foreseeable future.

  6. Afewknowthetruth 6

    Ignorance and denial are the mainstays of mainstream culture. That is why catastrophic collapse of western society via peak oil and the unravelling of fiat monetary systems is inevitable…. and coming soon.

    It is difficult for a man to understand something when his postion and salary are dependent on not understanding it.

    • Blighty 6.1

      but how does English’s salary depend on not understanding it?

      captcha: discover

      • Afewknowthetruth 6.1.1

        His job is to promote business as usual in the face of reality. Peak Oil means game over: bad for ‘the market’.

  7. gnomic 7

    What’s wrong with you people? Get with the programme. Er electric cars, er hydrogen economy, er nuclear reactors using thorium, er . . . . Don’t be so negative, growth is axiomatic, it can never cease. Don’t you understand?

    As for Blinglish and the genius called Joyce, perhaps they have made too many promises to roading companies to stop now. I expect more and more blacktop seems like a solution, the only answer they understand. It does employ people and plant after all. For now at any rate. Asphalt runs out alongside oil I think?

    And the sheople do love their cars – they won’t be happy when they have to take their feet off the accelerator.

    Hmmm – are we allowed to speak of retardation pejoratively, I thought this was non PC?

    • uke 7.1

      “…growth is axiomatic…”

      Just what I think when I look at the grass on the back lawn.

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