Did the price of crude oil peak last Friday, when futures traders in New York pushed up the near-term contract to an intraday high of $67.10, which stands as an all-time high?

Recent history suggests that keeping a healthy dose of skepticism is in order when it comes to predicting the imminent death of the energy bull market. The ascent of crude prices wasn’t history during the buying spree of late-June and early July, when prices pushed above $60 a barrel in New York for the first time in history. Nor was the bull market kaput in late February when prices crossed north of $50 a barrel for the first time. And it sure as heck wasn’t over when the $40 mark was breached for the first time in May 2004.
So why should we think it’s over now? What’s changed? Not all that much in the grand scheme of energy dynamics. Still, one reason for thinking that the oil train is due for at least a temporary rest is tied in to the odds that an economic slowdown is coming, in no small part due to oil’s rise. It’s no surprise to learn that bull markets in oil in the past have been associated with dramatic economic slowdowns. The obvious examples are also the most dramatic ones, starting with the oil crisis of 1973-74, when gross domestic product contracted sharply from late-1973 through early 1975.
It doesn’t take a Ph.D. in economics to realize that slower growth requires lesser quantities of additional oil at the margins. But higher oil prices may not lead to a recession this time, some pundits advise. The difference in this energy bull market is that demand is pushing prices higher. In contrast, past episodes of energy-induced recessions were the result of energy supply shocks of one sort or another. “When oil prices are pushed higher by demand rather than a supply shortfall, people have time to adjust,” David Wyss, chief economist at Standard & Poor’s in New York, tells AP today via The Shreveport Times. “We just keep on trucking.”
Based on recent economic news, who can argue? “A lot people are surprised with how resilient the economy has been with these oil prices,” observes Tom Bentz, an oil broker at BNP Paribas Commodity Futures in an article from published earlier this week. “Certainly, at $50 a barrel, a lot of people thought that would put a damper on things.”
But there was no damper in site at $50, or even $60. The question is, would $60 oil have a bigger negative impact on the economy after 12 months vs. the two months that crude’s been at that altitude? The answer is probably “yes,” assuming, of course, $60-plus holds. Indeed, the longer oil prices remain high, the greater the economic damage. Whether that damage is enough to push the economy over the edge to recession remains a debatable point, but an increasingly topical one.
For what it’s worth, one economist who watches oil goes so far as to cite the words that have come back to bite so many in the predicting business: It’s different this time. “For the past year,” University of California economics professor James Hamilton writes on his blog, “I’ve been telling people that this time it’s going to be different–the economy could weather the rising price of oil without a downturn.” He goes on to explain, “the reason that the oil price increases of the last two years have not caused a recession yet is that they have built up gradually, and resulted not from a drop in supply but instead from strong global demand. Faced with a gradual price increase and rising incomes, most people have been able to adapt to the higher prices and make adjustments in an orderly way that does not cause serious economic dislocations.”
But in what may be a significant sign of the times, Hamilton’s optimism has receded a bit, giving way to a touch more anxiety: “Just within the last couple of weeks, I’ve been hearing a lot more expressions of anxiety and concern–the sort of psychological factors that produce abrupt spending changes.”
As Hamilton and others remind, the surge in gasoline prices in particular has attracted Joe Sixpack’s attention. As the price of filling up his SUV has continued to rise, our consuming hero Joe has been forced to consider the financial toll and wonder what such a trend would do to his leisure spending over time. To date, there’s no smoking gun in the form of a material slowdown in consumer purchases. What’s more, there’s been no similar fallout in the real estate market. But with the Fed continuing to raise short term rates, and gasoline and energy still in a bull market, until we see otherwise, one has to wonder if the economy is headed for rougher times.
Of course, things still look rosy if you’re focused on this morning’s business outlook for the Philadelphia region. The Philadelphia Fed this morning reports that manufacturing in the area “continued to expand,” based on the August survey. In fact, the Philly Fed index rose sharply higher for the second month running.
But you don’t have to look far for a conflicting data, if you’re so inclined. On that front, the news in this morning’s leading indicator for July from the Conference Board offers another excuse to wonder about the future. Although the index rose by 0.1% last month, that paled in comparison to June’s 1.2% advance. Is the sharp slowdown in the leading indicator, which is designed to predict future economic activity, a sign of things to come? Perhaps, although it’s too early to tell, particularly with a volatile index such as this.
As we await for confirmation, or rejection, of the apparent trend suggested by the leading indicator, Ken Goldstein, economist at the Conference Board, which publishes the index, observes: “The leading economic indicators suggest moderate growth into the fall. “The spike in energy prices is one factor in this outlook, which mirrors the economic situation in much of the rest of the industrialized world. Of more concern is the level of business executive and consumer confidence. Both investment and hiring intentions reflect a level of caution over both pricing and profit strategies.”
If you prefer answers quickly, with hard edges and distinct conclusions, take a look at the molecular biology or plumbing. Economics, on the hand, will drive you crazy. Welcome to the asylum.

6 thoughts on “KEEP ON TRUCKIN’?

  1. L

    I don’t have a PhD, so please explain why “… slower growth requires lesser quantities of oil.”
    Slower growth — under 2% real growth, which is what is usually meant by a “global recession” — implies a slower rate of growth in oil consumption.
    Why would consumption decline, unless the globe experienced negative change in real GDP — which is rare.

  2. JP

    History suggests that when the economy expands at a faster pace, the rate of oil demand rises as well. When the economy slows, the rate of increase in the demand for oil may slow. If the economy contracts, an absolute fall in oil demand may occur. Economic cycles over the past decades suggest as much. It remains to be seen if the same holds true going forward, and whether these changes in demand affect prices in any real and lasting way.

  3. L

    Is there an echo here? That’s what I said.
    A still more fundamental “error” (that’s too strong a word) is the implied assumption that oil prices vary with global demand.
    That was true until recently.
    Variations in supply were not a factor due to the large spare production capacity maintained by producers, esp. the Saudis.
    Now there is little or none. We cannot verify the Saudi claims, nor does their production history provide any support for claims of additional capacity (expert on a non-sustainable “surge” basis).
    It now appears that prices vary not only by changes in oil “demand” but also supply (net, new capacity minus depletion of existing fields). Hence the importance of projects like the Megraprojects tracking of Petroleum Review.
    This is of course a bit of topic drift from the original article!

  4. tony leclair

    First time to your blog (or any blog, for that matter), and like your method of discussing the above topic. My opinion on “What is Different this time” strongly recognizes China and India as growth areas even while a slowing may occur in U.S. (and other industrialized). Secondly, the housing boom (with many new homes further from jobs) creates sustainable demand increase for the duration of employment… a trader I will look for higher highs
    1.(will the Gulf-Coast hurricane season really be as bad as expected?)
    2.(are things heating up politically in export areas?)
    …as an investor I will stay long oil and natural-gas for a very, very long time (especially good-old USA e&p’s…

  5. muckdog

    Good column. The biggest concern I have is that despite the higher costs of energy, we’re not hearing much from the President, Congress, or Environmental organizations regarding the topic.
    Nobody is talking about conservation.
    Alternative energy is full of undelivered promises.
    I think we’ll just keep drilling for oil until it runs out.

  6. JP

    L. is in fact right. What your editor should have written was: “slower economic growth requires lesser quantities of additional oil at the margins.” Sometimes it’s all happening at the edge. The original story now reflects no less. Apologies, and 20 lashes for the editor. –JP

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