THE DOWNSIDE OF HIGHER OIL PRICES...:

Don't Freak About Oil Prices!: With oil above $100 a barrel, and gas nearing $4 a gallon, doomsayers wrongly predict the end of the recovery. Zachary Karabell on how the economy no longer lives and dies with energy. (Zachary Karabell, 3/09/11, Daily Beast)

The common formula used by economists is that for every 10 percent increase in the price of a barrel of oil, the U.S. loses 0.2 percent of annual growth. Those figures, however, are derived from past patterns when oil increased, such as 1973-1974, 1979, and again a few years ago. The problem is that lots of other things were going on at the same time, so it is impossible to say that oil was the reason. There is a correlation, but is there causation? In addition, oil and energy has been steadily declining as a percentage of overall spending. It was as much as 9 percent of spending in the 1970s, and it has been between 4 and 6 percent in the past decade. That means that oil has to rise much more to have the same effect as it did in the past, and for a real oil shock comparable to earlier periods, the price would have to rocket up to nearly $200 a barrel in a matter of a few months.

Sentiment is a fuzzier issue. Another argument used to stoke concern of an oil crisis is that higher prices freak people out. They see $4 at the pump, and bang, their wallets snap shut and no more meals at Cheesecake Factory. First of all, the only evidence of that is anecdotal, and it is easy enough for a politician to pull out a constituent letter or a journalist to find a quote of someone saying that is what they are doing. But why people spend or don't is one of life's greater mysteries, and sentiment has been an extraordinarily unreliable guide to spending patterns.

...is that we aren't extracting them ourselves.

Posted by Orrin Judd at March 10, 2011 7:15 AM