Sunday, December 02, 2007

Do You Remember What the Analysts Were Saying When Oil Was Threatening to Go through the $30, $40 Ceilings?

I distinctly remember analysts working for financial institutions telling us that the global economy could withstand $30, even $40 /bbl oil, but that $50 would be a problem? Now we’re seeing the oil price hovering above $90 and verging on the $100 threshold, and people are finally worrying about the economy. But the main trigger of our worries appears to be the knock-on effects of subprime lending.

Are analysts making educated guesses, or are they just educated people making guesses? Maybe the Upper House Financial Affairs Committee can summon them to testify under oath.


Janne Morén said...

Not an economist so I'm mostly talking out of my hat here, but the exchange rate of the dollar, and the tax level of oil products should be a major factor as well.

If I look at the retail gasoline prices in Sweden, it was about 11.10-11.30 crowns in December 2005. The same product costs about 11.50-11.80 now. We're talking about an actual price increase of around 5% in two years.

There's two reasons: the dollar is a lot cheaper compared to the Swedish crown (and a lot of other currencies), offsetting a lot of the dollar-denominated increase; and most of the retail price in Sweden (and in much of Europe, and Japan) is tax, so the price of the actual product is just a small part of the entire cost.

As high-gas-tax countries like Sweden and Japan show, high oil prices do not actually hurt an economy a lot; people and businesses adapt to it. It's price swings that harms the most, and the accompanying uncertainty, but there the high taxes have the unintended consequences of damping those swings.

Jun Okumura said...

I think you’ve nailed it. The energy sector tends to be overrated as a factor in economic performance; our minds are scarred by the two Oil Crises, particularly the first one in 1973-4. I think that the analysts picked that particular figure mostly as a nice round number that would not be reached for a long time yet, so that their employers could urge investors to keep buying and at the same time look responsible.

Actually, anlaysts working for financial institutions were saying that. To further confuse me, the dollar did not move as nearly as dramatically against major non-Euro currencies. I’ll look around to see if I can find anything that I can understand that weighs the relative effects of commodity prices and currency fluctuations on the major economies, the U.S. in particular.