Will high oil prices bring the economy low again?

| January 16, 2012 | 2 Comments

By ollesvensson on Flickr

It’s always the unintended consequences that get you in the end.

The West seems committed to putting pressure on Iran over its nuclear enrichment program. (A program, I should add, that has been so far found to be purely non-military.) The pugnacious attitudes on both sides have increased tensions near the Straits of Hormuz, the tiny passage through which a third of the world’s oil passes. Which has naturally led to higher oil prices, as OPEC states in its January report.

In December, the OPEC Reference Basket decreased to settle at $107.34 [per barrel]. Nevertheless, the Basket ended the year for the first time significantly above $100 at $107.46 [per barrel]. This represents an increase of around $30 [per barrel] or 39% over the previous year and marks a new all-time high.

What no one counted on, however, was that the ironically-named president Goodluck Jonathan  would choose to double Nigerian gas prices over night as of January 1st. Which has, of course, made Nigerians angrier than hornets trapped in a vacuum cleaner. National strikes have entered their second week and Pengassan, the union of oil workers, has threatened to shut down oil output entirely.

Hence the oil action over the past month, as per OPEC’s chart of its reference basket:

Via www.opec.org

 

 

 

 

 

 

 

 

And now Americans are paying for this via higher prices at the pump. The American Automobile Association shows the following via its Daily Fuel Gauge survey:

  • Average price for a regular gallon of gas 1 year ago: $3.10
  • …………………………………………………………….1 month ago: $3.24
  • ………………………………………………………………….1 week ago: $3.37
  • ……………………………………………………………………….1 day ago: $3.39

And this trend, at this point in time, is so very dangerous. Why?

  • higher gas prices = less automobiles sold
  • autos contribute between 3 and 3.5% of U.S. GDP historically, according to the Center for Automotive Research
  • it’s not just cars — rising gasoline prices create a negative feedback loop on poorly connected suburban and exurban areas already suffering from the crisis in housing prices.

There are plausible arguments that it was the rise in gasoline prices in 2008 that flung the U.S. economy down the side of the mountain. So we ought to keep an eye on gas prices, hope that Goodluck has better luck, and pray that our leaders know what they’re headed for in Hormuz.

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Category: Macroeconomics

  • Voiceless Citizen

    …rising gasoline prices create a POSITIVE feedback loop on poorly connected suburban and exurban areas already suffering from the crisis in housing prices.

    Negative feedback loops dampen the input. Positive feedback loops enhance an input. “Positive” doesn’t mean the output is “good.”

    • http://www.financeaddict.com Finance Addict

      Good catch, thanks!