What effect would a strong oil rally have on the U.S. economy?

Discussion in 'Economics' started by sniper, Feb 27, 2011.

  1. sniper


  2. sniper


    Good stuff morganist. So do both Brent and WTI crude trade only in U.S. dollars?
  3. I don't know. I know that OPEC only sells in dollars. I think that is because of the stability that the currency has. I looked and both are indexed with dollars, but whether you can buy in other currencies I don't know. Either way it is enough to have the impact stated in the post.

    What did you think of it, were you being sarcastic when you said 'good stff morganist'?

    What do you think of my blog in general?
  4. sniper


    No sarcasm at all. I think what you had to say in your blog makes a lot of sense and is definitely not something I have thought about before. Like I said in my blog, I'm not an economist, just an equities trader. Really just wanted to see how others think a big crude rally will affect the U.S. economy.
  5. You might like my work. I am and economist an invent aggregated demand controls, banking systems and other things too. You can see my work at morganisteconomics.org.uk

    You can subscribe to my blog if you wish there is a link in the top right to set up an rss feed.
  6. Locutus


    Nothing personal, but your analysis is totally wrong. The fact that oil is traded in USD has no real impact on the value of the USD (Run in your head what happens if OPEC sells oil to Germany or GB. Is there a net change in dollar holdings in either country?).

    If impact of higher oil prices are being "absorbed by US competitors", why is the WTI/Brent-CL spread widening instead of tightening? I don't think we use WTI in Europe.

    You also seem to regard economics as an us/them game. I.e. low growth for China (they are more vulnerable to oil price vol which you correctly state) is good for Americans and will cause high(er) growth for the US because they can compete better. This is completely backwards. Growth in China is good for growth in the US and vice versa, contraction in China will cause contraction in the US. Will the US contract less? Maybe (who knows) but then contraction becomes a certainty.

    Further, your point on Americans "being able to buy more goods from around the world" is also totally backwards. Higher oil price -> Higher input costs (in China or US-based manufacturing and transport) -> lower purchasing power (unless wages increase along with price increase but that is unlikely with oil shock) -> prices may decline which at this point could easily cause a deflationary spiral. Alternatively the economy would just slow down as nobody could afford the products and companies (most of them) could not afford to lower prices and would thus become unviable and BK.
  7. sjfan


    Perhaps you may take note that economists do not 'invent' models/controls. They propose models, tests them empirically, and draw implications.

    You (via your blog and your posts here) sound more like an armchair activist with a cursory (ms)understanding of economics (hum... that's description suspiciously similar to Marx isn't it).

    When can we look forward to peer-reviewing your aggregate demand model? (which, hopefully might lead to a partial or general equilibrium model - the kind of stuff that economists are actually interested in when modeling demand; but you, as an economist, surely know this already).

  8. highly unlikely he is Marx
  9. Locutus


    To the OP: the idea of raising rates is not feasible in the face of an oil rally. As I mentioned, oil price rally is mostly deflationary and not inflationary, because producers will have to lower prices (thus margins) for everything to keep them affordable to the end-user.

    The alternative is stagflationary decreased economic activity which at this point could easily mean a double dip depression (so would a deflationary episode by the way, so in my view a double dip depression is becoming increasingly likely unless this oil rally goes back to $85. If the price holds for a prolonged period above $110 (say two weeks) a double dip depression becomes almost a certainty).

    If the FED had not been as retarded and aimed for a doubling of the S&P500 in two years they could have been raising rates since 2010. Today would be an excellent opportunity to ease a bit again and the S&P would probably be around 1050-1250 at this time if they had pursued some tightening.

    I've lost all faith in FED policy tbh, but the last thing they'll do now is tighten. Their hands are tied and there's only one way now unless the rebound becomes self sustaining (it is not yet. Any serious model that runs the effects of even quite minimal FED balance sheet tightening + raising rates will show not much short of a double dip).

    Nobody has any tools to fight this if it gets out of hand.

    Also rising oil != inflation and hasn't much to do with FED policy in itself. There also is not much inflation despite what all the tin foil hats will tell you about hyperinflation or whatever. The only place where you find "inflation" is where speculators are running amok.
    #10     Feb 27, 2011