Economic Security: Will the Third Oil Shock be the Charm?
The cost to the U.S. economy over the past 25 years of over reliance on OPEC oil, including the cost of price shocks, is estimated at $4 trillion, and a price shock in 2005 would cost the U.S. economy half a trillion dollars. Oak Ridge National Laboratory, October 2, 1996
Labor Day 2008 gave me some time to reflect on our country's economic independence. On July 4th we had just celebrated how our country won its quest for economic independence and personal freedoms. Do we really have economic independence today and what freedoms are we losing in trade for our dependence on oil? Should we change the message in the quest for energy independence back to our original capitalist and free market war for economic security? It appears everyone clearly understood what that battle was about.
Ethanol critics often say (as they appear to be speaking on behalf of everyone) consumers are not willing to pay more for alternative fuels through government tax incentives or directly at the pump. Somehow those critics forget to include all the external costs of gasoline and do not address the real economic impacts that increasing crude oil imports have on our economy -- as if the trillions of dollars escaping our economy for oil related costs came from 3 magic beans.
The price shock modeled by the Oak Ridge National Laboratory (ORNL) report, "The Outlook for U.S. Oil Dependence," simulated the impact of a two-year supply shock similar to those that occurred in 1973-74 and 1979-80, but starting in 2005 and ending in 2006. The model predicted that the shock would cause oil prices to jump from $20/bbl in 2004 to $50/bbl in 2005, costing the U.S. economy an estimated half a trillion dollars.
According to my calculations (from $50 to $150 per barrel) the actual rise in crude oil prices were three times the ORNL estimate, or add another $1.5 trillion log to the fire.
Americans Spent Ten Times as Much on Oil Imports in June Than Was Invested in All New U.S. Ethanol Producing Capacity Last Year. U.S. Senator Richard Lugar, August 12, 2008
Economic Security: Did Anyone Order Dominoes?
A quick spin on the radio dial this summer sounded something like this "oil prices hit another historic high... gasoline prices are up and the stock market is down...General Motors stocks hit a historic low... Circuit City stock loses 85% of its value since January... consumers are driving less and paying more... American Airlines lays off more workers due to flights restrictions because of higher fuel prices... and one Chrysler working being interviewed after a plant closing said he is heading directly from the unemployment line to the mortgage crisis line... Did any order dominoes? You are paying a lot more for gasoline than you see on the pump.
One out of ten jobs in the United States is auto manufacturing related -- Alliance of Automobile Manufacturers.
Sky-High Oil Will Make U.S. Go Broke: Stratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy. The U.S. consumes 21 million barrels of per day. For every $60 per barrel increase in the price of oil, the U.S. spends an additional $450 billion annually, or $38 billion per month, on oil. At $135 per barrel, the U.S. spends $1.0 trillion per year on oil, which is equal to 15% of the $6.8 trillion in take-home pay of everyone who pays taxes. Charles Biderman, Forbes, June 23, 2008
Oil Imports Account for Over Half of the Nation's Trade Deficit
In the last 10 years, the total of U.S. trade deficits has exceeded $1 trillion. This persistent pattern has contributed significantly to declining real wages and to increasing job insecurity. Most of its victims are middle-income working people. It is estimated that the manufactured goods trade deficit represents a loss of some three million American jobs. AFL-CIO Executive Council.
Why high oil prices make it hurt so bad: As for the price of oil, when it goes up and stays up, it has a negative effect on the entire economy because oil goes into making virtually everything, including steel, aluminum, plastics, rubber, fabrics, transportation … and food. People don't generally associate food and petroleum, but petroleum is used to make fertilizers and run the vehicles used for planting and harvesting, storage and processing, and the trip to market and for the final sale from the freezer in the store to the freezer in a home. And food prices affect everyone around the world. Bob Lutz, General Motors' vice chairman, global product development, Newsweek
The Perfect Crude Oil Import Storm: Your 401K and Savings Account, Your House Value, The War Tax, Deficits, Trade, the Economy, and Your Job!
Your Oil Tax is On the Rise
All of the pollsters this election season are pointing to the economy and all of the economists and economic indicators are pointing to crude oil prices and imports. The interconnection of energy oil dependent polices and the negative impacts they have on the economy intersect at your wallet. Rising oil prices act like a tax on consumers. Money spent by consumers on higher oil prices is not spent on other goods and services. So, profits and sales in many other businesses are squeezed. The lack of competition in the fuel market is taxing the taxpayer and the economy.
America is in a hole and it's getting deeper every day. We import 70% of our oil at a cost of $700 billion a year - four times the annual cost of the Iraq war. I've been an oil man all my life, but this is one emergency we can't drill our way out of. But if we create a new renewable energy network, we can break our addiction to foreign oil. It is the biggest transfer of wealth in history; Americans alone import 3.6 billion barrels of oil a year. In 2003, the tab for all that goo was only about $70 billion. At today's oil price, it is pushing half a trillion. Boone Pickens. The Pickens Plan (it will cost you your email address).
The price of oil rising from $80 to $100 a barrel is like adding $150 billion in taxes - Kenneth Rogoff, Harvard economist.
Meanwhile, the surging oil prices are acting like a tax increase—except the proceeds don't go to our friendly governments but to big energy companies and overseas producers. And there is lots of money involved. When gasoline was selling for closer to $1 at the start of the decade, American households were spending some $300 billion each year to drive their cars and heat and cool their homes. They are now spending some $700 billion a year on energy. Household gasoline bills in the coming year will rise about $100 billion—even if national gas prices stay near $4 a gallon through 2008. Mark Zandi, chief economist of Moody's Economy.com
Households will spend about $90 billion more this year on gasoline if fuel prices remain at current levels, according to a forecast by economists at Credit Suisse Holdings in New York. That will consume about 80 percent of the more than $110 billion in rebate checks the government is sending out.
Your Cost of the Iraq War: How Much Do you Attribute to Oil?
This is blog entry is not intended to question the value of or need for the war in Iraq. This is simply information about the cost of the war. Most analysts agree the War in Iraq has cost the United States somewhere between one to three trillion dollars. While some people will not agree the war is all about oil, the vast majority of Americans would now agree this war has something to do with oil. Therefore, consumers should attribute some portion of their tax bill and their gasoline bill to paying for the free flow of the world's oil. Protecting oil supplies is critically important, but ignoring the cost of that protection and not attributing some portion to the price of gasoline is misleading.
Considering an estimate of $500 billion for the War in Iraq, here is your personal economic impact: $4,681 per household, or $1,721 per person, or a cost to the U.S. of $341.4 million per day.
The flow of blood may be ebbing, but the flood of money into the Iraq war is steadily rising, new analysis show. In 2008, its sixth year, the war will cost approximately $12 billion a month, triple the "burn" rate of its earliest years, Nobel Prize-winning economist Joseph E. Stiglitz and co-author Linda J. Bilmes report in a new book. Beyond 2008, working with "best-case" and "realistic-moderate" scenarios, they project the Iraq and Afghan wars, including long-term U.S. military occupations of those countries, will cost the U.S. budget between $1.7 trillion and $2.7 trillion or more by 2017. Associated Press Sunday March 9, 2008.
Enroll 58,000 children in Head Start.
Put 8,900 police officers on the street.
Provide health insurance to 329,200 low-income children.
Hire 10,700 Border Patrol agents.
Give Pell Grants to 163,700 college students.
Provide foreclosure prevention counseling to 260,000 families.
"Another worry: This war has been particularly hard on the economy because it led to a spike in oil prices. Before the 2003 invasion, oil cost less than $25 a barrel and futures markets expected it to remain around there. (Yes, China and India were growing by leaps and bounds, but cheap supplies from the Middle East were expected to meet their demands.) The war changed that equation, and oil prices recently topped $100 per barrel.-- The Iraq War Will Cost Us $3 Trillion, and Much More, Linda J. Bilmes and Joseph E. Stiglitz, Washington Post Sunday, March 9, 2008; Page B01
The Cost of Oil & Your 401K and Savings Plan
Impact of Oil Prices on the Stock Market, By Omar L. Caban
Impact of oil prices on the stock market is inversely proportional. A shoot in oil prices leads to a nose dive in the stock market. And a decrease in oil price on an average leads to a higher stock market return. So, the effect of oil prices becomes predictable in the stock market. The effect is profound when the oil prices increase in the magnitude of 50% to 100% annually. The reasons being:
1. Any movement in the oil prices results in uncertainty in the stock market.
2. Higher the oil prices, higher the transportation, production and heating costs.
Say, a decrease in the oil prices by 10% in US will result in the expected return to double up on the stock market in the following month. The waves of the impact on the world market index will make its presence felt significantly. Though the stock market moves in the opposite direction with respect to oil prices, it is basically a one way traffic. The stock market returns has no impact on the crude oil prices. The entire stock market does not get equally or at the same time affected by the fluctuation in the oil prices. It is rather subtle.
The US industrial sectors that get most affected with rise in oil prices are:
1. The cyclical Services sector gets most negatively influenced. They constitute the general retailers, support services, media, entertainment, leisure, hotels and transport.
2. The sector which follows next in order is Cyclical Consumer goods. These include household goods, textiles, automobiles and parts.
3. The next negatively influenced sector is the Financials. They comprise of investment companies, banks, life, assurance, insurance, real estate, specialty and other finance.
Oil up, stocks down. Oil down, stocks up...
Oil and the Stock Markets, by John Brasher, CallWriter Publisher
As mentioned earlier, the general rule has been that increased oil prices drive the stock markets down. This is the conventional wisdom. But is it true? (Yes...) I want to point out a very interesting paper entitled Striking Oil: Another Puzzle, issued in November of 2003 by the Rotterdam School of Economics. The Striking Oil paper set out to address the question whether oil prices might forecast future stock market returns. Basing their conclusions on stock market data of 48 countries, a world market index and price series of several types of oil, the authors concluded that oil prices do indeed forecast stock market returns, stating that,
"We find that changes in oil prices strongly predict future stock market returns in many countries in the world... The impact of this predictability on stock returns tends to be large." The authors also noted that "Stock returns tend to be lower after oil price increases and higher if the oil price falls in the previous month." For the developed markets the study found that the change in oil price significantly predicts future market returns in 12 of the 18 developed markets. In all countries the effect is negative.
In other words, the stock market tends to move in the opposite direction to oil prices. Oil up, stocks down. Oil down, stocks up. This is a one-way street, however; stock market returns do not drive crude oil prices. So you can expect oil to be the primary force driving the stock markets until further notice. But the effects of oil prices are more subtle than that. All sectors are not affected equally, or at the same time. Here is what the authors found as to U.S. sectors when oil prices rise:
Most negatively influenced: Cyclical Services.
Next most negatively influenced: Cyclical Consumer Goods.
Third most negatively influenced: Financials.
Which sector is your job in?
Roughly $7 trillion has been wiped from world stock markets since the beginning of the year amid fears of a severe US economic recession and financial institutions reporting more mega losses. The market crisis will preoccupy us well into 2008. German Finance Minister Peer Steinbrueck on February 15, 2008.
The price of imported oil in the US doubled between summer 2003 and summer 2005, reducing consumer's purchasing power by more than 1 per cent of gross domestic product. Nevertheless, the economic slowdown that was widely expected never occurred. Consumers kept spending and businesses kept investing. ... The continued strong growth contrasts sharply with the economic weakness that occurred after almost every previous significant rise in the oil price. How do we explain this remarkable difference?
The key to the economy's strength in 2004 and 2005 was that household saving declined dramatically while the price of oil rose....The primary cause of this dramatic shift was the fall in interest rates and the resulting rise in mortgage refinancing. Homeowners who refinanced their mortgages took out cash and reduced their monthly payments at the same time. Much of the cash obtained by refinancing was spent on consumer durables, home improvements and the like.
The powerful effect of mortgage refinancing on consumer spending was a very happy coincidence for the American economy at a time when oil prices were depressing consumer's real incomes. If oil prices were to rise again in 2006 or 2007, the adverse effect on consumer's real incomes would not be offset by increased mortgage refinancing. Mortgage refinancing has now peaked and is declining. The Federal Reserve is raising interest rates again to counter the inflationary pressures that remain from the rise in energy costs. And individuals no longer have the large amounts of household equity against which to borrow. Harvard professor Martin Feldstein
The Lost Economic Opportunity is Even Worse
The Energy Independence and Security Act of 2007 and the renewable fuel standard set the foundation in place to reverse this national and personal economic security threat. If the goals of this legislation are accomplished we can begin to return to our roots of economic freedom and choice in a free marketplace. Think of your economic security and marketplace freedoms when considering purchasing an FFV and using E85. There is a lot more value than just the price you see on the pump.
What would you have done with the few trillion dollars lost to our reliance on crude oil and gasoline and the other few trillions of dollars the nation lost that could have been realized by economic stimulation generated from the production of new domestic renewable transportation fuels like ethanol and biofuels?
Please Note: We could never agree with everything in it's entirety in the research we provide through the information and links provided in the Clean Fuels Blog. Our goal is to find information that provides you with some new context and perspectives with regard to the nation's energy situation and it's impact on you. Our intent is to help your research efforts so you can make a more informed decision about your vehicle and fuel choices.