July 02, 2008
Recession and the oil shock of 2008
Unfortunately, this seems to be unfolding according to script.
The dramatic abandonment of gas guzzlers by American consumers continues, with last month's sales of domestically manufactured light trucks (which includes the once almighty SUV category) down 28% from June 2007.
Sales of imported SUVs, which had been holding up better, plunged even more dramatically.
For the lighter car category, sales of domestics fell 13%,
while imported cars, which tend to get better mileage, eked out a 4% gain:
The shift is a necessary change in the long run, but in the short run will definitely put additional strains on the U.S. economy, as it's precisely this kind of disruption in domestic spending that appears to be responsible for the contribution that historical oil price shocks have made to previous U.S. economic recessions. FT conveys some of the gloom:
The US car market is heading for its worst year in more than a decade as Americans turn their backs on large, gas-guzzling vehicles, according to June sales data due out today.
The figures come as the big US carmakers scramble to adapt to the dramatic shift in demand to more fuel-efficient cars and crossover vehicles. Chrysler yesterday said it would close a US minivan assembly plant and cut one of two shifts at a pick-up truck site. Chrysler's move will result in 2,400 job losses at the plants, both in St Louis.
There are even dark murmurs that GM, once the biggest company in America, could conceivably be forced into bankruptcy.
Is there relief in sight from the continuing rise in oil prices? I noticed this cheerful bit from WSJ Real Time Economics:
"Overshadowing all the economic data is growing speculation that Israel is gearing up to destroy Iran's uranium enrichment plants," said Bernard Baumohl of the Economic Outlook Group. "We assess the probability of such a military strike to be 85%, and that it will likely occur between September and November."
Maybe they're just trying to scare us.
Maybe they're succeeding.
Posted by James Hamilton at July 2, 2008 12:28 PMdigg this | reddit
Gasoline consumption for the last four weeks availible (week ending June 20) is down nearly 2.6% from the same time last year.
In March, when driving was down 4.3%, consumption was only down 1%.
I expect June driving to be down near 6 or 7% and am pretty confident we'll see negative economic growth.
Posted by: aaron at July 2, 2008 01:01 PM
The automobile (I'm using the 1910 era term) will once again become a luxury item for the privledged few, vs the masses just as it was in the early 1900's. Cheap commodities, steel, plastics, etc are now expensive so the increase will eventually have to be passed on to consumers, also the cost of running a auto and not just gasoline, but tires, oil changes, town/state taxes/registrations, insurances are all going to make this mode of transport prohibitive to many, couple that with the increased ridership in public transportation, and increased use of car rental services will cause great pain and consolidation in the auto industries. James
Posted by: James at July 2, 2008 01:03 PM
Again, all this is good news in the medium to long term.
High oil prices result in :
1) Faster innovation in alternative energies (biofuels, solar, wind, etc.)
2) Acceleration in engine innovation (hybrids, plug-in hybrids, fully electric vehicles).
3) Materials science innovation to reduce the weight of cars. All carmakers expect to shave 10% out of the weight of their cars by 2015.
4) Less driving equals less wear and tear on roads and bridges (which cost $200B a year to maintain).
5) Less driving equals fewer traffic accidents (which cause 42,000 deaths, 2 million injuries, and $500B of costs each year). Imagine just a 5% reduction in these numbers.
6) Less driving equals less traffic jams, which sap productivity away.
7) Less competition for parking spaces.
8) The immense amount of land devoted to gas stations, parking lots, etc. can be reduced. The amount of land consumed is so huge, that even a 5% reduction will free up a ton of land for other uses.
9) Lastly, innovation in videoconferencing, VoIP, and Webex technologies will advance.
All this is good, good, good.
Posted by: GK at July 2, 2008 02:04 PM
Perhaps Israel recognizes that it has more to gain than even America, if America reduces its dependence on Middle Eastern Oil.
The only way tiny Israel could achieve this outcome is :
1) Invent alternative energy technologies.
2) Use their military to increase the price of oil (by threatening to attack Iran, etc.).
Somehow, they seem to be achieving both. Give them a huge amount of credit - they are successfully getting America off of oil, something no other country could do.
Posted by: GK at July 2, 2008 02:07 PM
Come on, let's not get carried away here.
There is still a substantial amount of 'easy' adjustment that has yet to occur.
People who used to buy $40K cars will instead shift down to $25K cars.
People who used to buy $25K cars will instead shift down to $18K cars (the price of a mid-tier Honda Civic).
SUVs will shift to Priuses and other sippers.
Carpooling will increase (which immediately cuts gas costs by almost half).
You are also assuming that plug-in hybrid and filly electric cars will never happen, even though several are already pretty far along in development. Chevy Volt/Tesla Whitestar/Aptera Motors/etc. There are aleady choices that offer over 40 mpg, and soon there will be many choices that offer over 50 mpg.
Posted by: GK at July 2, 2008 02:17 PM
I look at various economic forecasts, especially with regard to climate change issues. Some forecasts I've seen:
a) Seem to think world oil production and imports keep right on growing.
b) Seem to think that a carbon tax equivalent to more than $.10 to $.20/gallon would be suboptimal economically, but don't seem to include any effects from the price rise of a dollar or two / gallon we've already seen.
Q1: can you recommend economic forecasts that do a good job of modeling peak Oil+Gas?
Q2: other than where the money goes, are there other reasons to treat a $1/gallon tax different from a $1 price rise due to demand shock, supply shock, speculation, or whatever?
Posted by: John Mashey at July 2, 2008 02:23 PM
re: Israel strike on Iran
It's kind of hard for a President who's launched one preemptive war of his own and who is now agitating for another to tell Israel to back down. Yet our friends in OPEC are expecting the President (or at least the United States Government) to do just that. I doubt Mr. Bush has enough respect within the military command structure to launch his own war, but allowing an Israeli attack is within his capabilities. Not only would allowing such an attack set Middle East diplomacy back at least a decade, but the resulting oil shock (don't expect any help from OPEC) would be a crushing blow to what remains of the U.S. economy.
Posted by: Dave Brown at July 2, 2008 02:37 PM
What would be more damaging, the start of WWIII or a 4-5 month interval of military "custodianship" in the United States while we await the arrival of a new President (and more importantly, a new Vice President)?
Posted by: esb at July 2, 2008 03:00 PM
The more I watch this cycle unfold the more it reminds me of 1974. Many people believed the 1974 recession was really two recession with a phony recovery in early 1974 between the two legs down -- one in late 1973 and the second at the end of 1974.
But this one just does not have the big unintended inventory build we had in 1974 or the wage-price spiral.
Posted by: spencer at July 2, 2008 03:21 PM
Peak Oil is here ...
Europe, Japan and the US are all using less oil this year than last yet here we are, prices doubling.
Paul Krugman has eluded to "The Oil Drum" many times and has posted some of their articles. I suggest you check it out.
The US car industry, as we know it, is terminal. The legacy costs, ineffectual management and an oil price that will only increase have sealed their fate.
Posted by: Michael McKinlay at July 2, 2008 03:56 PM
I, for one, am perfectly willing to pay $6/gallon of gasoline for a few months if it means that Iran's nuclear program is successfully destroyed. Note that it would also enable us to transition out of Iraq and Afghanistan faster, saving us money.
So you have to carpool with someone for a while, so what? Let's not be penny smart, pound foolish here. Is having to carpool with someone, or having to buy a Prius instead of an SUV, too much to sacrifice in order to prevent Iran from getting nuclear weapons?
Posted by: GK at July 2, 2008 04:55 PM
there is one thing ,i think u must add. US one of the biggest company starbuck is going closing 600 stores. My friend said it is one of the biggest company.
and yes please tell me about US and its economy future story.
Posted by: Viral Katira at July 2, 2008 11:44 PM
John Mashey, (Q1) I'm personally skeptical that we have any reliable models for this. As you can see, we have enough problems understanding what happened to oil prices last week, let alone predicting where they are headed ten years from now. (Q2) To a first approximation, a permanent $1 tax on gasoline should have the identical effect on quantity demanded as a permanent $1 increase in the price brought about by a shift in the supply curve.
Posted by: JDH at July 3, 2008 02:22 AM
GK, Electric vehicles, and hybrids did enter My mind when posting My comments. The question I had/have, is where does the "juice" come from. Sure it sounds simple to say let's all buy electric cars, and just plug them in,doing this will result in a huge increase in demand for electricty, that in many cases (not sure of the percent on this stat) is gemerated by burning oil. NG demand for power generation will cause a further supply demand imbalance, and nobody wants more coal fired plants, as far as nuclear, the combination of NIMBY, waste, high start up costs, and slow permit process, will render this source unavailable.
Posted by: James at July 3, 2008 03:16 AM
Tuned for MPG instead of emissions, a ~2500 lb. car can get 60+ mpg. I wonder how interested the chinese and Indian car manufacturers will be in the green movement.
Posted by: Anonymous at July 3, 2008 04:39 AM
JDH: a $1 tax will not see a price rise of $1, unless one assumes a vertical demand curve.
Also, can somebody please tell the peak-oil crackpots to shut up? All commodities are following a similar price path, and those drooling apocalyptic dimwits surely do not believe we are running out of everything from coffee to platinum. Or do they?
Posted by: bartman at July 3, 2008 06:00 AM
I see we have a rosy scenario being spun for our proposed little action against Iran. Unfortunately, it is highly unlikely that Iran will go along with it, just as a large number of Iraqis decided that the were not going go with the program and submit to occupation. And it is unlikely end Iran's nuclear program.
Posted by: Rickster Sherpa at July 3, 2008 06:48 AM
If there were plug-in hybrids, or full electric cars, you wouldn't have to worry about supplying an entire fleet immediately. Surely they would enter the market with the classic acceptance curve, with some early adopters and some waiting to see ...
(Of course this is similar to the old saw: If we had cheese we could have ham and cheese ... if we had ham.)
Posted by: odograph at July 3, 2008 07:19 AM
Note that conservation an efficiency are already cost effective, now. Promises, while nice, only maybe cut the gas/electric bill later on.
Posted by: odograph at July 3, 2008 07:22 AM
This was from in the news yesterday. "Urging the world to brace for a "really big reshuffle" in energy expectations, Christophe de Margerie, CEO of French energy giant Total SA, said he expected oil production to plateau in just 12 years at 94 million barrels a day ? less then 10 million barrels more than available now. And he warned the forecast was optimistic."
If a CEO of a large oil company is saying we are close to peak oil, I think it merits some consideration.
Posted by: GWG at July 3, 2008 07:54 AM
Wrong. Electricity is generated by COAL, not oil. You should know this.
Furthermore, if most cars become plug-ins, that will merely increase electricity demand by 10%. this can easily be offset by solar, wind, nuclear, or more coal.
Lastly, CFL and LED bulbs are already prolierating, and are slashing electricity use. The surplus electricity can be fed to plug-in cars.
It is rather silly to think NIMBYism will prevent new electrical sources to the extent that car ownership drops to 1910 levels. That is an absurd assumption.
As I said, let's not get carried away here..
Posted by: GK at July 3, 2008 07:55 AM
But this is simply a symptom of the actual problem that is driving us recklessly toward economic disaster. Below is a post written by a friend. I take exception to his assertion that the price of oil is not driven by inflation - I believe inflation is a major component - but the analysis of my friend is also a major component. Note that the FED governors are poised to raise interest rates to influence inflation. This is exactly the wrong policy to follow and will lead to serious economic problems.
This is crucially important. Dollar strength is entirely dependent on the perceived expectation that our basic economy will be strong in the future. The dollar is now weak becuase the common perception is that our economy will be weaker in the future. This is entirely realted to the stated fiscal policies of the Democrats who are generally expected to win all three branches of government in the fall. Interest rate manipulations by the fed cannot change this situation. The most expedient way to strengthen the dollar is to extend the Bush tax cuts but that seems like an impossibility. If the Fed raises rates, as the confused wing of the purportedly 'supply-side' economists, are recommending, then the economy will move rapidly into an even more severe recession, or worse, with rapidly rising unemployment accelerating the housing asset crash, increasing defaults and foreclosures spreading into the commercial sector and dooming many regional banks while markedly worsening the capital adequacy of the major world banks. At the same time, dollar demand will collapse even further and monetary inflation will increase...while the price of oil and other commodities may decline becuase their price has been demand dependent and not inflation driven all along. Inflation will actually increase while the world economy will suffer its greatest collapse since the great depression. Trichet is about to walk the EU off this cliff tomorrow.
I have written about this confusion about the nature of monetary inflation as distinct from price behavior of discreet goods within 'inflation' index basket measures many times on these pages and that misunderstanding among all our economists, central bankers and media pupets remains the critical mistake of our time. The purported 'supply side' economists in this mix are an embarassment.
If you are interested in a deeper discussion of why the FED interest rate methodology was, is and always will be a failure read this article. http://www.realclearmarkets.com/articles/2008/07/in_2008_shades_of_october_1987.html
Posted by: DickF at July 3, 2008 08:12 AM
"Wrong. Electricity is generated by COAL, not oil. You should know this."
Not in my state (IIRC coal supplies only about 10% of my power, through Southern California Edison).
Posted by: odograph at July 3, 2008 08:16 AM
Save gas: Take off your cat/con.
Posted by: aaron at July 3, 2008 08:39 AM
While the US electric industry may have the capacity to recharge electric cars (off-peak or overnight charging), where are all the batteries for the millions of cars sold each year going to come from? Has NHTSA approved any battery banks? What battery technology will be used: lead-acid, Ni-Cd, Li-ion? Each have their own problems. The cost of GM's "shining" savior, the Volt, keeps going up up up - at about $40k and continuing to rise. We'll see a lot more hybrids and motorcycles/scooters before you see many electric vehicles.
For Peak Oil, take a look at TheOilDrum.com for the data. All of the easy oil is gone, so that tapping into the remaining reserves is more costly and difficult. The big find off the coast of Brazil announced last year may have reserves of 10 billion barrels or more, but a billion dollar oil rig is needed to drill for it, not to mention the cost for the cutting-edge engineering needed just for maintaining the well and the pipeline.
It comes down to flow, and right now I just don't see the world being able to sustain, let alone exceed, the ~82 mbpd oil flow rate beyond the next year or two. You also need to consider the increasing internal use of oil for exporting countries and how many countries have gone from exporters to importers over the last 5 years. For the US' two closest suppliers, Mexico is just about tapped out, and Venezuela is close behind. Hopefully the US will find some oil off of its shores. What we can get out in the next 5-10 years will be a trickle (
Posted by: Marc V at July 3, 2008 09:35 AM
In response to GK. Democrats to win all three branches in Nov? What the heck does that mean. Supreme court is appointed and Bush already has it stuffed.
Extend tax cuts? Thats a great idea. Just like all the republican handling of economy for last seven plus years? Excuse me if I bow out.
Posted by: wl at July 3, 2008 09:38 AM
[Guess I reached my word limit or it does not like the less than sign]
... a trickle (less than 1 mbpd) compared to our current thirst (20 mbpd).
Posted by: Marc V at July 3, 2008 09:39 AM
"a crushing blow to what remains of the U.S. economy."
If you can trust the shifting basket of goods, understated deflator and its use as a metric in general, GDP shows that the economy has been getting stronger 9 out of ten years for about a century.
The preconditions are a lot to ask, but at least its quantifiable. If you want to talk about how expensive gas and food are:
Consider the superiority of modern cars. More expensive to run? OK, you ride a 1973 oldsmobile on leaded gas, with no airbags, 1000 extra pounds of dead weight, sagging tires that last 20k miles, a windshield that crashes in on contact with flying pebbles, no electronic stability control, manual locks and windows, a body that rusts out in seven years, no cataltyic converter, a carburator and howling wind and engine noise. Try to parallel opark one.
Consider availability of most foods we have in the supermarket today. Year round blueberries, strawberries, mellons, carrots, snap peas etc. How many kinds of meat and fish? How many different brands of swiss cheese, some literally from Switzerland? Prepared meals that aren't that bad?
Can you set aside the birth-death model and undocumented worker issues and trust the unemploymenmt numbers? 5% is not bad. 7% is probably not bad relative to history and to other economies.
"What remains of the U.S. economy" is the best one on the history of earth +/- a few of our own records from recent years.
Posted by: KevinM at July 3, 2008 10:22 AM
That's what I've been increasingly thinking, but I've been wondering if I were missing something.
I have friends who think Peak Oil is real and we need to be getting better at efficiency real fast. One used to be Vice-Chairman of Chevron, in charge of all exploration and production, and the other was Chairman of Shell. Neither is a crackpot or dimwit.
Can you explain why your opinion carries more weight than theirs?
Posted by: John Mashey at July 3, 2008 10:55 AM
KevinM = A refreshing sane voice among a horde of loons here.
Posted by: GK at July 3, 2008 10:56 AM
Be calm, everything is proceeding according to plan. If you don't think so, here's a quote of the first three paragraphs from a NY Times Article (Neela Bannerjee) of October 14, 2001, which was, for some reason, linked to by DRUDGE today.
"THEY are the nightmares, the worst confluence of misguided decisions and startling violence, that politicians and oil executives ponder briefly and then shoo away:
That sympathizers of Osama bin Laden sink three oil tankers in the Strait of Hormuz and choke off the narrow, bow-shaped channel that funnels 14 million barrels a day from the Persian Gulf to the rest of the world. That the United States attacks Iraq, and Israel launches a huge strike against the Palestinians, driving them from their camps and staking out more land -- all of which spurs the Persian Gulf states to cut off oil for the West. Or perhaps that a popular uprising, led by sympathizers of Mr. bin Laden, topples the ruling Saud family in Saudi Arabia, by far the world's largest oil producer.
'If bin Laden takes over and becomes king of Saudi Arabia, he'd turn off the tap,' said Roger Diwan, a managing director of the Petroleum Finance Company, a consulting firm in Washington. 'He said at one point that he wants oil to be $144 a barrel' -- about six times what it sells for now."
Well, Osama is still at large, but he's nonetheless gotten his wish - - oil is at $144 a barrel. Way to go, Dubya and the rest of the Bush family! The Saudi's knew you had it in you to accomplish great things for them.
Posted by: RPEwing at July 3, 2008 10:57 AM
Michael, the Oil Drum recently thanked us as one of their top 10 referrers over the last 3 months.
Posted by: JDH at July 3, 2008 02:46 PM
Peak oil might be here but it's an engineered peak. There is plenty of extractable oil in the ground. What there isn't, is plenty of atmosphere to keep dumping the combustion products into. The oil companies know this and that's why we have the engineered peak. It's allowing them to reap maximum benefits while simultaneously encouraging the development of alternatives which we need.
However, an attack on Iran won't mean $6/gallon gas for a few months, that will happen without an attack on Iran. An attack on Iran will lead to ww III because of Russian and Chinese ties with Iran, and in the case of China, dependency upon Iran.
A strike on Iran will remove 2 million barrels a day from the world market. Removing one million by Invading Iraq got us from $30 to $145 barrel, removing another 2 million ought to get us up to $500 or so a barrel. If you can still get gasoline at all it will be $20/gallon, and the rest of this world will see the USA has essentially replaced Nazi Germany and respond accordingly, but since we've got nukes now, the destruction will be far greater, and maybe 6000 years from now there will be a religion with a mythology of how God decided man was bad and destroyed us with giant fireballs followed by a global deep freeze.
Posted by: Robert Dinse at July 4, 2008 02:20 AM
If Israel does bomb Iran later this year, this would be one of the most irresponsible acts in human history.
Israel's paranoia about Iran's nuclear program, which is not a threat to anyone even in the medium-term at a time when oil is nearing $150/barrel, would provide the long awaited Middle Eastern supply shock that would wreck global economies.
People float these rumors, and I'm not sure what the point is. I would hope that if it's true, then the U.S. could prevent it.
Now that the merde has hit the air conditioner, people perversely want to speed up the process. I notice this among peak oil doomers, many of whom hang out at the aforementioned Oil Drum, who gleefully watch the unraveling.
I am hoping mankind does not self-destruct, but there is no evidence of wise, prescient policies over the last 15 years that I can see.
Peak oil, and our outrageous import dependency, along with the collapse of the Housing Bubble, are the longer term causes of the meltdown. But humans, being what they are, dwell on short term factors guiding the oil markets or the economy at large. I constantly hear "experts" telling us that they are hopeful about the longer term, but they are quite vague about the reasons. No policies are yet in place that would guide us toward a better future.
Market responses alone will be quite inadequate to the task ahead.
In my Prognosis for the United States, I laid out a goal whereby the OECD achieves a permanent 10% demand cut over the next 7 years in an attempt to keep the oil market in some kind of manageable balance. This would buy us some time to make structural changes to our transportation infrastructure, including the consolidation of the geography of living and working. Of course, when I say it, no one listens. Perhaps we could get some so-called important people to say it.
Posted by: Dave Cohen at July 4, 2008 05:40 AM
the advantage of Hybrid/plugin hybrid/pure electric vehicle is that it is more efficient to generate energy in large power plants than to burn the fuel to run an ICE vehicle.
So yes, we still have to generate the energy, but the efficiency is much higher per BTU at a power plant. Granted, we will need to build plants closer into the cities in order to cut line loss, but that not undoable. Besides NIBMYism fades at the reciprocal to energy costs. At $10/gallon, people will be much more accepting of a power plant than at $1 /gallon.
I'm somewhat skeptical of carbon sequestration, but if it ever does work, it's going to be used at power plants, not the back of your tail pipe.
Posted by: philG at July 4, 2008 10:33 AM
re: hybrid / PHEV / BEV
In some places (like CA), local air pollution (including CO2) matters as well.
I recommend the work of Stanford Professor Mark Jacobson. See especially his testimony to the House of Representatives, April 2008 about disproportionate effects of CO2 in California, as that was crafted for Representatives and hence is fairly accessible.
Posted by: John Mashey at July 4, 2008 02:22 PM