Transcript Slide 1

Oil and the Economy
Christopher J. Neely
Assistant Vice-President, FRB Saint Louis
Presentation to the Ballwin Rotary Club
April 22, 2008
1
Disclaimer
The views expressed are my own
and do not necessarily reflect
official positions of the Federal
Reserve Bank of St. Louis, or the
Federal Reserve System.
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What to talk about today?
Current events
Oil and the real economy
Oil and gasoline prices
Lessons for the climate change debate
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Current Events
Oil Prices have risen since 2002.
– The international security situation
– Growth in global, primarily Asian, economies.
http://stlouisfed.org/publications/re/2007/b/pages/oil_prices.html
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Spot Oil Price: West Texas Intermediate ($/Barrel):
2000-2008:03
Current Events
120
100
USD/bbl
80
60
40
20
0
2000
2001
2002
2003
2004
5
2005
2006
2007
2008
Chinese Oil consumption (Thousands of barrels/day)
Current Events
8000
7000
Thousands barrels/day
6000
5000
4000
3000
2000
1000
0
1975
1980
1985
6 1990
1995
2000
2005
Current Events
Oil companies make money when oil prices rise.
Oil is their major asset.
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Real Oil Prices and Petroleum Industry Profits
80
40
Petroleum and coal industries' profits as share
of all non-financial company corporate profits
(right axis)
30
20
60
10
40
0
20
0
1945
-10
-20
1950 1955 1960
1965 1970 1975
1980 1985 1990
1995 2000
Quarterly data through Q1.2007 (profits), Q2.2007 (oil price)
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2005
Petroleum and coal industries' profits as
percent of all non-financial corporate profits
Real oil price in Q2.2007 dollars, deflated
by CPI
100
Real oil price: WTI spot price expressed in
Q2.2007 dollars, deflated by CPI (left axis)
Current Events
Inflation-adjusted oil prices are now just a little
higher than in 1981.
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Yearly World Oil Prices ($/bb)
World: Avg. Crude Price of UK Brent/Dubai/Alaska
Real Crude Oil Price
100.00
Nominal Crude Oil Price
90.00
80.00
70.00
$/bbl
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1967
1972
1977
1982
1987
10
1992
1997
2002
2007
Oil and the real economy
Rising oil prices often are associated with
recessions.
James Hamilton (UCSD) has shown a strong
relationship between oil and recessions.
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Oil and the real economy
Spot Oil Price: West Texas I ntermediate [Prior'82=Posted Price]
$ /Ba r r e l
Civilian Unemployment Rate: 16 yr +
SA, %
Spot Oil Price: West Texas Intermediate [Prior'82=Posted Price]
120
$/Barrel
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Civilian Unemployment Rate: 16 yr +
SA, %
80
12
100
10
10
60
80
8
8
40
6
60
20
4
6
40
0
2
70
75
80
85
90
95
00
Sources: Wall Street Journal, Bureau of Labor Statistics /Haver Analytics
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4
20
0
2
70
75
80
85
95
00
12 9 0
Sour ce s: Wa ll Str e e t Jour na l, Bur e a u of La bor Sta tistics /Ha ve r Ana lytics
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Oil and the real economy
Why have rising oil prices caused recessions?
– If input prices change, then
firms change the types of capital and labor employed
and consumers will change their consumption bundles.
Rising oil prices will also redistribute wealth from oil
consumers, to oil producers.
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consumption
a proportion
of GDP
OilU.S.and
the asreal
economy
0.12
The U.S. economy has resisted recession
despite the rise in oil prices since 2002.
0.1
– Recession might be in our present and/or
future but we haven’t observed one yet.
0.08
Oil expenditures are now is a smaller
share of U.S. nominal output.
0.06
0.04
0.02
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
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Consumption per Unit of Real GDP
OilOiland
the real economy
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3.5
3
2.5
2
1.5
How much oil does the U.S. consume
per unit of real output?
1
0.5
0
1967
1972
1977
1982 15
1987
1992
1997
2002
Oil and the real economy
Oil imports have become an even more important
share of U.S. consumption since the first calls for
“energy independence” in the 1970s.
U.S. producers are relatively high cost producers.
We could produce more oil domestically, but at a
higher cost than we could import it.
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Oil and the real economy
US Production, Imports and Consumption
US Cons of Oil (thousands of barrels/day)
25,000
US Oil Production (thousands of barrels/day)
US Imports (thousands of barrels/day)
Thousands barrels/day
20,000
15,000
10,000
5,000
0
1967
1972
1977
198217
1987
1992
1997
2002
Oil and gasoline prices
Why do gas prices change when oil prices change?
– Crude oil is a major (and volatile) component of
gasoline prices.
http://stlouisfed.org/publications/re/2007/c/pages/gas-prices.html
– If oil prices rise, the cost of producing gasoline rises and so does
its price.
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19
Oil and gasoline prices
Why do expectations change gas prices?
(The oil in the tanks has been already purchased.)
– Oil is a storable commodity: Spot and futures prices
are linked.
Higher expected prices cause sellers to sell less today and
store more for tomorrow.
This is good! It enables smoother consumption during
disruptions.
http://stlouisfed.org/publications/re/2007/c/pages/gas-prices.html
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Oil and gasoline prices
An implication for
forecasters:
Futures price contain no
information about
expected future spot
prices that isn’t in
current spot prices,
interest rates and storage
costs.
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Prices are signals
Rising prices indicate either rising demand or
falling supply (or both).
High prices encourage more production and less
consumption, preventing shortages.
Prices are usually the best way to ration scarce
goods and services.
– Buyers are the most willing (and able) to pay.
Redistribution of initial wealth can achieve
“fairness” goals within a price system.
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Lessons for global warming
Let’s stipulate—without debating—the following:
– Climate change is happening.
– Human CO2 emissions are substantially responsible.
– The increase in temperature/ CO2 is a bad thing, on
balance.
– Reducing CO2 emissions is desirable.
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Lessons for global warming
Conventional price theory would support taxes on
CO2 production/emission.
Taxes should be introduced gradually.
We can use the CO2 tax revenue to reduce other
taxes that distort behavior, like income taxes.
A tax will discourage consumption and encourage
alternative sources of energy.
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Lessons for global warming
Rationing/mandates are very costly & often
ineffective.
– Lines for concert tickets are wasteful.
– CAFÉ standards spawned the SUV industry.
CO2 cap-and-trade systems amount to gifts to the
polluters.
– One could auction off permits to create CO2. That
would produce effects similar to a tax.
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The End
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