Postcards from Old Europe – When the past comes back to haunt you
The current news backdrop reminds me of the situation faced by Bill Murray in the movie Groundhog Day. In the movie the main character is caught in a time loop and is forced to relive the same day over and over again.
This theme is replicated nicely in current news flow – turn on the TV and what do you see? The headlines are dominated by Iraq on the geopolitical side and by oil on the economic side of things. Google news gave me 248 articles about oil this morning. If you scan them, you’d think that the high price of the black stuff is responsible for everything from soggy equity markets to high gold prices and various points in between. This gives me the impression that very many people seem to be very nervous.
One person who is probably very much worried about the state of the energy market is our favorite former oil man, George W. Bush. Could it be that the same stuff which greased his entry into business will be the very thing that will have him over a barrel come November?
What impact could higher oil prices have on the economy? With oil prices near $49 a barrel many economists are worried about the headwind that this generate for an economy which is rapidly losing momentum. Real people (i.e. not economists) are worried about higher prices for heating oil and gasoline.
These fears are justified. Every recession that the US has experienced in the past 30 years was preceded by a rise in the oil price. The price of oil is now over 50% higher than it was at the end of last year – it stands to reason that business and consumer spending power will be eroded if the oil price remains at such a high level.
The only good news is that US consumers have been reducing the amount of their income spent on energy over the past 20 years. In the 1980’s households spent around 8% of their income on energy products. This percentage dropped to under four percent in 2002 but has since risen back up to around 5% this year. Any further rise in prices will take this number higher again if income doesn’t rise as well. What this means is that disposable income will take a hit of up to 1% compared to last year. As the savings rate is already at near-record lows it probably won’t be possible to reduce the amount being saved to augment today’s income.
In fact the converse could hold true. A combination of daunting future prospects brought on by higher energy costs and a weak stock market (and/or a weak property market) could actually force consumers to reassess their current situation. If this causes them to increase their savings rate we could be looking at an even larger reduction in consumption.
A look at the numbers shows us that consumer spending on energy products and services was at around $418bn in the second quarter. If we factor in current prices and assume that we’ll have a normal winter we could be looking at an energy bill of – say – $465bn in Q4. This equates to around $90bn more than households spent in Q4 of last year. This is roughly the sum that the last round of tax cuts put into consumer’s pockets in 2003.
This is not good news for the incumbent in the run-up to the election. If oil price hikes counteract the effect of the tax cuts and employment doesn’t improve, people will probably think twice before they answer the question “Are you better off than four years ago?” in the affirmative. I’m pretty sure that George W. Bush didn’t think that oil could have this kind of impact on his career when he founded Arbusto Energy in 1978.
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