Kash addressed below the premise of whether higher oil prices will lead to a U.S. recession. As I was grabbing the car keys, Kathleen Hayes said something about how oil prices dramatically dropped so I wondered two things: (1) could this Kudlow forecast be sensible; and (2) might my $20 buy more than 8 gallons at the corner Arco? It turns out I got only 7.9 gallons for the $20 and these folks are saying I should get used to it.
Since oil is priced in dollars, it was only natural that the oil price rose substantially in the 1970s. Early in that decade, oil “shocks” were a U.S. phenomenon related to the Federal Reserve’s failure to maintain dollar stability, and a world phenomenon to the extent that other currencies followed the dollar’s inflationary descent … Producers could drill for oil during the Bretton Woods era highly confident that they would receive $2.50 a barrel.
Has Tamny confused nominal price stability and stability of relative prices? Certainly the relative price of oil has varied but would a return to the gold standard change that? For some perspective, let’s return to another post by David. Tamny may have a small point in the statement that the real dollar devaluation lessened the reduction in European and Japanese oil demand, but the high relative price for oil was due to a reduction in the supply from OPEC. And unless the Saudis cared only about buying gold, Nixon’s decision to allow the dollar to float was not the cause of the reduction in supply.
Kudlow’s colleagues suggest that U.S. economic growth is the cause of high oil prices. Actually, much of the growth in world demand coming from other nations as David’s graph shows the U.S. has been cutting back on oil consumption – at least relative to our income. The NRO confidence that higher oil prices will lead to a vast increase in U.S. supply of oil strains credibility. Let me elaborate with my only quibble with David’s second oil post and his graph, which shows U.S. production relative to real GDP at about one-third of its 1950 level. Since U.S. real GDP is about six times what it was in 1950, doesn’t his graph show U.S. production is double what it was back in 1950?
I doubt higher prices will lead to a massive increase in our production. And Tamny has failed to elaborate why a return to the gold standard would either increase production or lead to more conservation. The only conservation that might come out of this Nixon/Greenspan-bashing would be if the NRO crowd decided to hold a conference on oil prices in Los Angeles – as I’ll do my part and simply stay home.
Update: Under Kash’s post MN Jim suggests we check the website of BP – which was not only anticipating my post but also a very good suggestion as the PowerPoint slide has a lot of useful historical data on world production and consumption by region.
Update II: Calculated Risk diagrams and discusses the DOE’s Short-Term Energy Outlook.