September 16, 2004


Economist's Corner: Will Rising Oil Prices De-Rail the Economy? (Carl Steidtmann, August 2004, Deloitte Research)

Since 1985, the real price of oil has stayed in a fairly tight range, breaking to the upside only briefly during the first Gulf War and below their price range during the Asian currency crisis.

While oil prices today are above US$46 a barrel back in 1990 they peaked briefly at $51 a barrel in 2004 prices. The all time record high was hit in 1980 during the Iran hostage crisis when oil price exceeded $91 a barrel, roughly twice today’s price. Energy productivity chart, real GDP per trillion BTU, 1973-2003 Even a run up to $90 a barrel will not have the kind of impact it did back in 1980 due in large part to the steady improvement in energy productivity that the economy has experienced over the past 20 years.

Since 1973, energy productivity is up nearly 120%. From the price peak in 1980, energy productivity has risen roughly 80%. Factoring the rise in productivity into the equation energy prices today would have to rise above $164 a barrel to have the inflationary and growth deflating impact that oil prices had back in the early 1980s. Reaching such a price in the short run is not very likely even assuming a massive destruction of oil capacity which is always possible in this age of terrorism.

So while the economic pundits will wring their hands over rising oil prices and tell you that they are at all time record highs, the truth of the matter is quite different. Real oil prices are about half their record highs and the steady improvement in energy productivity has made today’s economy much less vulnerable to oil price shocks than what it was 20 years ago.

But just try convincing people this is a deflationary epoch.

Posted by Orrin Judd at September 16, 2004 11:07 AM

The ideological commitment to a "scarcity" world-view is not easily shaken as it is a sub-rational faith based on materialism and determinism.

Posted by: luciferous at September 16, 2004 11:44 AM

If oil prices rose to $ 165 a barrel anytime in the next three decades, it's likely that we'd have more pressing concerns than what the price of oil is.

Posted by: Michael Herdegen at September 17, 2004 2:29 AM

I've lived in my house for 14 years now, and its market value has increased by just about the same amount as my total earned income over the same period.

So, yeah, you'd have a hard time persuading me that I'm living in a deflationary epoch.

Posted by: Harry Eagar at September 17, 2004 3:38 PM


No one can convince you of anything--you're a subjectivist.

Posted by: oj at September 17, 2004 5:18 PM

OK, I just had lunch with two economists, and they both agreed that the constraint on our continued economic growth will be the fact that "even professionals with higher incomes cannot afford to buy a house."

Besides the value of my house is not what I put on it subjectively but what the market puts on it.

Both economists are, by the way, solid globalizers and one of them (Jack Suyderhoud) is pretty famous for it.

Posted by: Harry Eagar at September 17, 2004 8:44 PM

Only you could find economists who don't believe in supply rising to meet demand.

Posted by: oj at September 17, 2004 8:55 PM

Except that they're not making any more land, as the old saw goes.

You were just telling us how homes in parts of NH are listing for half-a-million dollars - Why isn't anyone building 1,000 home developments around there ?
I suspect a combination of factors which limit developers' ability to build.

Same thing with the Hawai'ian islands, and Silicon Valley, and Washington D.C., and so on and so forth.

Even in areas where there are few limitations to growth, home costs are often high.
One pressure is location. Even when lower cost homes are available with a 20-mile commute, most people want to live in the metro area of the cities they work in.

Dwell magazine, Oct/Nov '04 issue, has a graph showing that home prices, between 1970 and 2003, increased six times faster than the rate of inflation in Denver, four and a half times faster in Phoenix, and four times faster than the rate of inflation in Las Vegas.

Posted by: Michael Herdegen at September 17, 2004 9:20 PM


No, homes in Hanover are. You can buy the same home for $80,000 twenty minutes away. The Internet makes it possible to work from anywhere, so people will.

Posted by: oj at September 18, 2004 8:12 AM

Try fixing your transmission that way.

Supply seldom rises to meet demand. Sometimes it works the other way around.

The recent history of gray iron casting would be an example.

As for homes, Michael's got it. Or, as I wrote in a column about housing earlier this year, "There's no faster way to be labeled a public enemy than to propose to build affordable housing."

Posted by: Harry Eagar at September 18, 2004 11:30 PM

Our yellow pages list about thirty transmission places--calling the first three secured appointments at each by Wednesday.

Posted by: oj at September 19, 2004 8:41 AM

If homes twenty minutes away from Hanover are selling for 85% off Hanover prices, then obviously they aren't considered part of the Hanover supply by buyers.
The only way for supply to "rise" in Hanover is for more homes to come to market that actually take pressure off of prices in the Hanover market.
If developers built a huge complex in Hanover, of only one-room, cold water flats, those wouldn't compete with the half-million dollar homes either.

Posted by: Michael Herdegen at September 20, 2004 5:22 AM

No. Obviously there isn't a sufficient shortage for them to be incoporated into the "supply" yet. When the need arises they will be.

Posted by: oj at September 20, 2004 7:11 AM