Oil At $100 A Barrel--Maybe Not So Bad This Time

I see no reason that oil is so expensive but it is.  And that is a fact, for now.  But, as screwed up as some people think the world is right now, it could be worse.  It could be the 1970's when the whole engine fell off the track.  Here is an article from the London Times that gives some insight as to why now is different.

Gerard Baker

It's human nature to imbue inert numbers with profound significance. We celebrate 18th birthdays and 25th anniversaries as though doing so might pause, even for a moment, the merciless ticking away of life's clock. We build buildings without 13th floors. In Asia they will go to extreme lengths to avoid any contact with the number 4. The Bible can be read like an extended number puzzle: twelve tribes, ten commandments, seven plagues, four horsemen.

In financial markets this tendency has fascinated economists. A certain number in an index or a price for a traded instrument is said to be “psychologically important”. It is believed that traders behave differently when they near or cross some round number - a $2 pound, 10,000 on the Dow Jones industrial average.

It seems implausible at first sight that hard-bitten capitalists would be victim to such unreason. Yet the idea that particular numbers matter persists in the minds of some people in the markets, which is enough to make it a kind of reality, I suppose. Sometimes, it seems, like an old horse that whinnies and retreats from some unseen spectral object, markets really do think a particular number might be haunted.

One of those magic numbers is $100 for a barrel of oil. On Wednesday, for the first time, contracts for future delivery on the New York Mercantile Exchange finally recorded that figure.

There seemed something especially ominous about hitting such an iconic number on the very first trading day of the new year - a year already invested with so much fear for the global economy. It was generally reported that, unless you happen to work for an oil company, this was a seriously bad number.

I beg to differ. There are good reasons not to fear $100 oil and even a case for mild celebration. That might not make much sense as you stand shivering this morning spending half a day's wages to fill up your petrol tank. And it might appear to sit oddly with our last experiment with rapidly rising oil prices - those halcyon economic days of the 1970s - but it's true.

The oil shock of the 1970s did help to bring the world that ugly pantomime horse called stagflation - stagnation with inflation. The quadrupling of prices in the 1970s to a price that, in inflation-adjusted terms, was just about the same as this week's was one of the primary factors behind the worst decade for the global economy since the Great Depression.

But while it's obviously true that today's higher oil prices represent both an inflationary risk and, at the same time, a recessionary one, as a kind of additional tax on our disposable income, there are lots of good reasons to think the effect this time should be much smaller than it was 30 years ago.

The first is that, back then, a sluggish global economy was hit hard by the deliberately restrictive policies of the oil-producing nations. It was, in the economist's jargon, a supply shock, as oil output was restrained by the producers from keeping pace with demand.

This time the principal reason for rising prices is less to do with supply than with demand. For all the talk of imminent global recession, 2007 was another bumper year. The continuing advance of China and emerging markets, solid growth in the US and a sprightly performance by those old laggards Europe and Japan meant that available oil production could not keep pace with demand. Now, of course, the rising price is the mechanism by which that demand will be restrained a little - but that is no reason to think a slump is on the cards.

The second big difference concerns the other end of the stagflation horse - inflation. A good reason for mild optimism today is simply that our policymakers have already lived through the experience of the 1970s and know what to do to avoid repeating it.

Back then, the oil shock came on top of a decade of steadily rising inflation, which nobody seemed to mind much. In the 1960s and early 1970s respectable economists thought there was a trade-off, that a bit more inflation was a price worth paying to keep growth going and unemployment down. So they “accommodated” the oil shock with easier monetary policy.

We learnt the hard way there is no such trade-off. If central banks accommodate higher oil prices with easier monetary policy, the almost immediate consequence will be rapid inflation, which will kill off growth.

Of course, today's economic climate poses threats. The continuing global credit crisis means that central banks might not be able to be as tough with rising inflation as they would like. But current easy monetary conditions are a temporary, emergency measure to tide us over this immediate crisis, not a permanent feature of the economic landscape.

The third good reason for suppressing our misery at $100 oil is that we are much less dependent on that baleful commodity than we were. Manufacturing - with a high energy-intensity - takes up barely half the share of our economies that it did in the 1960s. Thanks to improved production techniques and more efficient combustion engines, it has been estimated that today each unit of the West's economic output requires about a quarter of the energy input that it did 40 years ago.

Which leads us to the case for gentle euphoria at world record oil prices. A large part of the reason we are more energy efficient than we were 40 years ago is precisely because oil prices went so high in the 1970s, forcing us to use fuel more effectively.

Whether or not you believe that climate change is the world's biggest medium-term economic challenge and whether or not you believe that attempts to reduce our consumption of fossil fuels will make a bit of difference to it, you cannot seriously think that going on consuming oil at current rates is healthy.

Our continuing dependence on oil is wasteful, it messes up our environment, and it maintains our ruinous obligations to some of the most unpleasant regimes in the world - from Saudi Arabia to Venezuela via Russia and Iran.

If $100 doesn't wean us off the petroleum fix, perhaps we should start cheering for $200.

Comments

[country lady]

This is NOT a joke!
We have oil in our water well that we drink from! It's been that way since my family bought this land 30 some-odd years ago. We are poor as Church mice, financially speaking, and my husband and I are both disabled. We live in a poor community, so we would like to make a lot of money, and start some hand-up charities, like a free hospital... and a closer school.

Question, how is the best way to get money for our oil?

[Payday Loan Advocate]

Most of us is fun of having a credit card but we can’t never be denied the fact that we are getting inbound to the indebtedness due to the cause of credit card. By today that we are struggling to the economic crisis never much indeed that the using of the credit card is being so much impractical today nowadays.
Americans are struggling with the current economic crisis that has been brought on by careless mortgage lending. However, America is not the only country that is negatively affected by this economic calamity. The International Herald Tribune tells its readers that the credit crunch is being felt in Europe, too. Small businesses like Dominique Boudier’s printing company, outside of Paris, rely on credit with their suppliers to operate. Boudier’s creditors are reducing their offerings by half. The suppliers’ credit insurance companies have mandated this cut. Considering the 60-day lag time in which clients pay, Boudier’s business needs additional cash flow to compensate for this major shortfall. Because Boudier’s bank has its hands tied as well, Boudier fears the worst. Boudier’s bank, like many others throughout Europe, started to put its money to sleep with the European Central Bank instead of investing it in other banks and the economy as a whole. When banks began to fail and liquidity was disrupted, credit began to dry up. Similar to America’s Federal Reserve Bank, the European Central Bank uses a mechanism based on the ability to produce as much fiat money as necessary. Fiat-money currency, which is essentially credit money, loses worth as soon as the government declines to further guarantee its value. Inflation is on the rise. Many people believe that stronger private banking systems that make responsible decisions will eventually solve this problem. In the meantime, payday advance loans will be easier to get for those that need short-term assistance and can’t afford to wait for the faltering central banking system.
Post Courtesy of Personal Money Store
Professional Blogging Team
Feed Back: 1-866-641-3406
Home: http://personalmoneystore.com/NoFaxPaydayLoans.html
Blog: http://personalmoneystore.com/moneyblog/