Ostrich-like Denial Continues

In August 2009 I wrote an opinion piece published in the New Zealand Herald - "Country Oblivious to Next Oil Shock". I opined that “the spike in oil prices to US$147 a barrel in 2008 helped trigger the global recession. And soon after a global economic recovery, the inevitable return to triple-digit oil prices will lead the world right back into recession.” Back then the oil price was around US$70 a barrel – today Brent Crude is indeed over US $100 – in triple digit territory.

I suggested that we have not learned “ the lesson that global Gross Domestic Product is inextricably linked to cheap and abundant oil? As prices rise, global GDP falls.” I criticised the government for failing to plan for this looming crisis and the media for failing to report it, and concluded with a fear that “this ostrich-like denial will continue through several more price shocks and recessions.”

So what has changed in the past 18 months ? … well nothing really. Both the government (and opposition) continue to pretend that there is nothing to worry about, in spite of NZ seemingly headed for a double dip recession and warnings of an imminent oil shock coming from the IEA and heaps of other credible sources. Our mainstream media have, with a few rare exceptions, ignored the issue like the plague. When the issue does get attention it’s invariably a “cut and paste” from an overseas newspaper , but lacking any New Zealand perspective. For example this from the Economist, on 20 January 2011 re-printed in the NZ Herald (but not available in their online version). It repeats many of the points I made 18 months earlier (what took them so long?)……

• “The oil price has pushed the world into recession in the past.”
• “Blame for the recent great recession is typically laid at the door of the financial crisis, but it is often forgotten that America’s (and New Zealand’s) economy was shrinking for nearly a year before the collapse of the investment bank Lehman Brothers.”
• “James Hamilton, an academic at the University of California, points the finger at oil. He reckons that the rise in the oil price from early 2007 largely explains the downturn between the end of 2007 and the third quarter of 2008.”
• “the balance between oil supply and demand is a concern... the rise in the oil price is due to strong demand and stagnating production……. a full recovery from the financial crisis will push the oil price back to its highs of mid-2008.”

Are we headed for inflation or deflation? There are divergent views on how the next oil shock will impact on the economy.

1. Jeff Rubin says the main threat is inflation.

• “As the prices of petrol, diesel and home heating fuel rise, consumers’ energy bills eat up a growing share of their after-tax income, forcing cutbacks in more discretionary areas of spending.”
• “by far the greatest impact that oil price shocks have on the global economy is the one they make on inflation and, hence, interest rates. This linkage is the means by which they have typically delivered a mortal blow to economic growth. Oil shocks have always given rise to growth-ending increases in interest rates as central banks are forced to respond to the inflationary fallout they leave behind.”
• “The last recession was no exception. As oil prices soared from $35 per barrel in early 2004 to almost $150 per barrel in the summer of 2008, consumer price inflation in the US tripled to a rate of almost six per cent. It didn’t take long before interest rates caught up to inflation and, in the process, blew up the massively over-leveraged subprime mortgage market and the economy with it.”
• “Oil prices caused the last recession, and oil prices will cause the next one as well. Energy inflation is already on the march. In fact, this time around oil prices are rising much earlier and much more rapidly than they did last cycle. Inflation is already running at nearly a five per cent rate in China; as oil prices go on to set new record highs, it’s only a matter of time of before we see those inflation rates in North America and in the rest of the OECD. And when we do, get ready for another oil-induced global recession.”

2. Nicole Foss of the Automatic Earth blogspot on the other hand believes the next financial crisis will be caused by deflation and debt deleveraging (with super inflation coming later).

for the rest of the post see my blog - oilshockhorrorprobe