Pursuant to yesterday's discussion, let's think a bit more quantitatively about what kind of constraint oil supply places on fiscal stimulus. The blue curve above shows the path of gross world product, in trillions of 2010 dollars, measured at purchasing power parity.* 2011 is the IMF's projection. The red curve shows what might have happened in a counterfactual world had the world's governments followed a perfect fiscal stimulus path that exactly compensated for the loss of aggregate demand due to the fiscal crisis and overleveraged consumers in the developed world. I've implemented this as GWP growing in 2008-2011 at the same average growth rate as had occurred in 2000-2007.
2009 is the year in which it's easiest to see the issues. In the counterfactual world, 2009 gross world product would have been 6.4% larger than in the actual world. We can estimate the implications for oil supply because we know that the global income elasticity of oil demand is about 2/3. Thus the counterfactual world would have required an additional 4.5% more oil than the real world (other things being equal).
The actual path of oil production and price looked like this:
Here various estimates of production are on the left scale and monthly oil price is on the right scale. 2009 oil production was around 85mbd (depending on what source you like) so in the counterfactual world we would have needed it to be around 88-89mbd. Now, in 2008, oil production got up to around 86mbd (on an average basis) but doing so triggered (or required) an oil shock in which prices briefly reached $135/barrel on a monthly basis and almost $150 on a daily basis. What would the likely price path have been had the world then needed an additional 2-3mbd the following year?
To give an indication of the scale of 2-3mbd, note that the loss of 1.6mbd of oil this year (Libya) triggered something like a $30 increase in the price of oil (before it became clear that the global economy was slowing again causing prices to fall). That, along with other commodity price increases, was enough to cause a little bump in inflation that significantly reduced the Federal Reserve's latitude for action.
My guesstimate is that in the counterfactual world, oil prices would have continued their rise and hit $150-$200 in 2009. Poor Matt Simmons might even have won his bet. I think that, in turn, would have undoubtedly been high enough to affect world growth negatively.
* The idea of purchasing power parity is that, especially in developing countries, the price of goods and services may be very different than in the US when measured at market exchange rates. Let's say a $20 haircut in the US is $5 in China. To construct a PPP estimate, we want to value that haircut at $20 rather than $5 and that's what the IMF (source of this data) attempts to do. The IMF doesn't seem to directly make available a real (ie inflation adjusted) series for PPP GWP however, so I use the nominal series they do provide and then deflate it with US GDP deflators from the BEA.
It's not an oil constraint on fiscal stimulus, it's an oil constraint on the effects of fiscal stimulus.
ReplyDeleteSuppose a flat output at the 2008 peak level. Fiscal policy tries to counteract the demand shocks (that may or may not have been triggered by the high oil price). This prevents the downturn being as large but more importantly causes a realignment of economic activity since energy prices are kept high, expectations of demand for energy remain high and so high prices are forecast, and so energy investment takes off at the expense of other economic activity.
What we've had instead is a collapse in private demand leading to no real increase in future energy price expectations despite the stagnation in supply. This environment has not be conduicive to investment (witness US wind installations in 2010).
Oil is priced on the S&P 500, not on supply and demand.
ReplyDeleteFiscal policy can only use the real resources available in the economy, it can only create fiat money, not fiat oil.
ReplyDeleteIn times like this it should focus a lot on increasing energy efficiency, which at least in the USA can increase by a large margin.
Regarding oil specifically, Americans are the world's gluttons,m believing the right to drive as much as they wish is a fundamental human right. An American can rail against a cigaret smoker WHILE sitting in his running car, spewing heavy amounts of the most carcinogenic type of smoke (the kind that contains oil particles) into people's lungs. Many shun public transportation, fearing that taking a bus would make them look like our "lower class." They won't end their addiction to oil.
ReplyDeleteOur economic crises are the result of a generation that somehow embraced the notion that we just never, ever burden corporations with rules, requirements and limitations. I remember Reagan introducing this idea, claiming that removing regulations would leave corporations free to create an abundance of good, family-supporting jobs. We saw how that worked out. Since Reagan, US corps have received several TRILLION dollars in tax cuts and handouts, much of which continues to be used to export American jobs. Any corporation that exports jobs should be dealt with as traitors, causing grave harm to this country.