Don't Freak Out About Oil Prices!

by Zachary Karabell Info

Zachary Karabell is President of River Twice Research  and River Twice Capital. A regular commentator on CNBC and columnist for Time, he is the co-author of Sustainable Excellence: The Future of Business in a Fast-Changing World and Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends On It.

With oil above $100 a barrel, and gas nearing $4 a gallon, doomsayers wrongly predict the end of the recovery. Zachary Karabell on how the economy no longer lives and dies with energy.

With gas prices approaching $4 at the pump and turmoil roiling Libya and other parts of the oil-rich Middle East, the past week has seen multiple warnings that rising oil prices imperil the American economy. David Rolley, a money manager who helps oversee $150 billion for the firm Loomis Sayles, is typical of the breed, declaring that higher prices at the pump "mean there is going to be less money to spend on anything else" and his firm promptly cut its forecasted growth for the U.S. economy this year to 3.1 percent from 3.5 percent.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Most Americans have a sense of the oil shocks of the mid-1970s, which contributed mightily to the economic malaise of those years. And between 2005 and 2008, spiking global demand for oil led to an ever-larger burden at the pump (though that did not deter many from loading up on gas-thirsty SUVs that an antediluvian Detroit rolled out by the millions, presaging the auto-industry collapse in the fall of 2008). These earlier oil shocks, followed by deep economic crises, have created a widespread belief that as oil goes up, the economy goes down.

It seems a neat explanation, but it's not true, not now and not really in the past. Yes, the extremely rapid rise in prices at the end of 1973 and into 1974 triggered by OPEC's embargo in protest of U.S. support of Israel in the 1973 Arab-Israeli War did shock the U.S. economy. But the United States had already entered a recession before the oil crisis and that simply accelerated it. The increases before 2008 aggravated people, but those grumblings did little to halt consumer spending. If anything, people just started to drive less and companies found a way to become more efficient. Higher energy prices didn't torpedo the economy; derivatives and leverage in the financial system did.

The common formula used by economists is that for every 10 percent increase in the price of a barrel of oil, the U.S. loses 0.2 percent of annual growth. Those figures, however, are derived from past patterns when oil increased, such as 1973-1974, 1979, and again a few years ago. The problem is that lots of other things were going on at the same time, so it is impossible to say that oil was the reason. There is a correlation, but is there causation? In addition, oil and energy has been steadily declining as a percentage of overall spending. It was as much as 9 percent of spending in the 1970s, and it has been between 4 and 6 percent in the past decade. That means that oil has to rise much more to have the same effect as it did in the past, and for a real oil shock comparable to earlier periods, the price would have to rocket up to nearly $200 a barrel in a matter of a few months.

Sentiment is a fuzzier issue. Another argument used to stoke concern of an oil crisis is that higher prices freak people out. They see $4 at the pump, and bang, their wallets snap shut and no more meals at Cheesecake Factory. First of all, the only evidence of that is anecdotal, and it is easy enough for a politician to pull out a constituent letter or a journalist to find a quote of someone saying that is what they are doing. But why people spend or don't is one of life's greater mysteries, and sentiment has been an extraordinarily unreliable guide to spending patterns. People are perfectly prepared to feel anxious and spend, and the only reliable indicators of spending patterns are income and employment. Both of those have been weak in America, and that is cause for real concern, but it has little to do with the price of oil.

The ones who will suffer the most from rising oil prices are the ones who have the least impact on the economy.

Gasoline prices are shown at a gas station in Del Mar, California on Mar. 9, 2011. (Photo: Mike Blake, Reuters / Landov)

Americans today consume about 23 barrels of oil per person each year. That means that every $10 increase in the price of oil is a $230 hit to the "average" American. That burden hits different people differently. Let's say that oil goes up to $150 a barrel, which would be dramatic. That would cost us another $1,000 each. OK. But this year, with the Social Security tax rebate, most of us have about $1,000 more than last year, so it's a wash.

Even so, for tens of millions either unemployed or underemployed, that's a bit hit and will likely crowd out other spending—although a not-inconsiderable portion of those tens of millions don't own a car. Maybe they will suffer as companies like Proctor & Gamble raise the price of their products to pass on higher oil costs, but those companies have been eating most of the price spikes. And to be blunt, whatever growth there is in the unwieldy beast we call the American economy isn't coming from that struggling group. It is coming from corporate America and the more affluent. In short, the ones who will suffer the most from rising oil prices are the ones who have the least impact on the economy as it is and the ones doing badly already. That's a harsh truth, and cold comfort to be sure, but there it is.

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I had a conversation once with Eric Newell who was president and Ceo of Syncrude Canada Up untill @ 2004. It was right around the time oil was hitting $140.00 a barrel.He told me that the price of oil was becoming problematic in regards to the cost of prodution.As oil went up everything they needed to produce oil went up as well.Add in the speculation on commodities and the price and just as importantly, the availibility of raw materials becomes problematic.If rubber goes up so does the cost of the huge tires they need for their equiptment providing they can get the tires.When prices are volitile peopel tend to stockpile and hoard resources.China is famous for doing this.Now if you write this scenario for every single nut and bolt you need Its clear to see how the high price of energy can be extremly problematic even for energy companies.Syncrudes #1 leading cost to the production of a single barrel of synthetic crude is the cost of energy.I know, he had to go over it with me a few times before it sunk in my brain.An oil company bitching about the price of oil. That being said, Im not sure i can agree with mister Karabell. High energy prices will crush this meager recovery .

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 6:04 am, Mar 10, 2011 FPPLLC

Peak oil is real and it is here. See the free information on: http://www.chrismartenson.com/ Watch his "Crash Course" and learn what is coming.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:29 am, Mar 10, 2011 gatorbass

seen it, scary!

Flag It | Permalink 12:36 pm, Mar 10, 2011 Master of Muppets

Interesting, if Bush was still in the whitehouse, Karabell's article whould be about the sky falling, Bush and his oil buddies making millions and how children and old people were going to die because oil prices are driving up the cost of everything. So instead of telling the truth, that a lack of controlling our own oil dependency, letting foreign countries and speculators set our prices at the pump, it means children, old people and every American are going to hurt because oil prices are driving up the cost of everything. Meanwhile libs are talking about raising taxes on oil to keep it around $5-6 a gallon to promote their "altrenative" energy scams that they are looking to make billions off of and Karabell is singing kumbaya.....

Flag It | Permalink | Reply 1:38 pm, Mar 10, 2011 Locks99

I can't believe Karabell wrote this. He ought to visit the real world more often.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 7:22 am, Mar 10, 2011 gatorbass

He believes if regular folks are suffering, its not such a big deal cause they dont contribute much to 'todays' economy.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 8:06 am, Mar 10, 2011 Dr_SwampGas

It's true that vthe middle and lower class have been largely written off over the last 30 years as more and more wealth and income become concentrated at the top. This was also the case in the Gilded Age and the 1920s--a pyramid-shaped economy and society. We already have that in America and the latest depression has already made that even worse. Taken as an aggregate, however, further reducations in consumer spending due to high prices will have a ripple effect throughout the entire economy, just as they always do. This will increase poverty and unemployment even further. Nor do I need to point out that a system like this will be very socially and politically unstable, and that the signs of such instability are already plain for everyone to see.

Flag It | Permalink 12:41 pm, Mar 10, 2011 prettyscary1

I was thinking the same thing Locks...this guy has some huge blinders on.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 8:22 am, Mar 10, 2011 YearsLaterXXI

prettyscary1,not huge blinders. Our country has the biggest division in those who have and those who have nots. Our standards are dropping for many that had futures but these young new journalist the new uba rich the new global and those who have cannot relate to other's pains,concerns.This is an elitist,in elitist groups. Have no idea where he comes from ,but this is one of those having dinners in the fancy restaurants at night.Even if we are part of his world we are not incensitive to what is happening and affecting many.40 cents ,is nothing for wealthy or rich or good jobs or spoiled.It affects those trying to make ends meet.,travel,feed their hungry,unemployed The disconnect in our country is bigger everyday.Rude.

Flag It | Permalink 9:25 am, Mar 10, 2011 Dr_SwampGas

I agree that we are ruled by an aristocracy or oligarchy that has globalist connections and is no longer tied to the national eceonomy. Academics have been pointing this out for 30 years and now it's obvious to everyone except the paid Repuke hacks who post on here. These people at the top think they have insulated themselves from the poverty, chaos and unemployment down below. They know that they own the government and both political parties, and so do I. I've known that for many years, and I realize that they are the ones who arranged a bailout for themselves in the latest depression. Even so, the political, social and economic ripple effects from oil shocks will be serious in this country and abroad, and make the present depression even owrse.

Flag It | Permalink 12:45 pm, Mar 10, 2011 flyoverland

As the resident educator of elites on the real world, I have to agree with Locks99. He says the average American use would mean an increase of $230/year. Hmm. Averaging all 330 million Americans, including babies, the elderly in nursing homes, those who ride the subway, etc. maybe he's right. However, the producers who drive to work and who have disposable income would see much higher hits. Gas is up a dollar a gallon over the past year. The avg. car holds 15 gallons and say the average driver uses a tank a week. right there is $780 a year just on gas, not to mention the increase on just about everything that is shipped, commodities, etc. While gas prices were not the cause of the recession, but gas prices were the match that sparked the explosion. When mom and pop who live paycheck to paycheck have to pay more the get to work, they might not have enough to pay the house note. They have to work, they don't have to pay the bank, Sears, or Visa. And so it goes. I lived through the 70's where you could only get gas every other day depending on the number on your license plate and all stations were closed on Sundays. I lived 250 miles from my hometown and when I drove back on Sunday, I had to make sure to get gas on Saturday nite and take a gallon can with me to make it there on fumes. It did alter behavior. It also altered spending leading to a period of stagnation and jobs were very hard to find. Until we begin drilling out own oil and quit allowing ourselves and our economy to be held hostage by tinpot dictators, we get what we deserve. We must stop being led by ivory tower elitists who don't like oil, but do not have any viable alternatives.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:14 am, Mar 10, 2011 AlanD2

For all practical purposes, our oil is gone, flyoverland. We use 25% of the world's oil, but we only have 2% of the world's oil reserves. What oil is left is in places that are hard, expensive, and dangerous to get to (remember the BP oil spill?). Switching to electric or hybrid cars is our best bet for a partial long term solution. Switching from airplanes to high-speed rail for short- to moderate-length trips is another. Riding bicycles for short local trips (which I do) would also help.

Flag It | Permalink 10:48 am, Mar 10, 2011 Master of Muppets

In alan's world, electricity is not made from oil, Amtrack makes money. trolls like himself are kings and fairies fart rainbows - your as clueless as the author of the article. There is more than enough oil in Alaska and the gulf - having them drilled by Americans companies who follow regulations instead of ones like BP who get safety awards for donating to Obama to avoid safety inspections and controlling our own enery desitny instead of foreign dictators and tyrants. A little reality for you Alan, the Russians and Venezualans are just outside of the international waters drilling baby, drilling the oil Obama won't let American companies drill for. Who do you think is going to folllow drilling safety regulations better.... American companies who have to answer to us or the henchman for Hugo Chavez? I spent to years working on getting 5 wind turbines along the beach and as usual the same whining alanD2 trolls have been protesting it for years. A clean burning nuclear power plant? forget it - maybe in another 20 years when the elitist yuppie scum can't afford to charge their ipads.

Flag It | Permalink 1:21 pm, Mar 10, 2011 zooage

You are right on most every point. I also lived through the '70s crisis, both of them. It was never easy to even find gas . The problem was then and is now Speculators. They have it within their hands to tell us how much we will be paying for our fuel. They should be stopped. There should be no speculative price increases for Food and Fuel.It only hurts our economy. Drilling here will not solve our problem though. As one who likes the thought of a strong military (not using it for every problem), we need to ensure we have strategic reserves for a long siege if needed in a time of war. If the Middle East falls and decides to no longer sell us any oil, we would be screwed. Although we get a very small percentage of our oil from them. Oil demands are at the top of the reasons Hitler fell. No oil, no war. And with China buying up vast amounts of oil futures, they very well one day control a vast majority of the worlds oil supply. This is hurting the poor and middle class hardest, at a time when we can least afford it. We need to take a stand against Wall Street, it's supporters, and Big Oil. They have had record profits every year for the past decade. It is all about the money, and it only goes one way, to the top.

Flag It | Permalink 2:16 pm, Mar 10, 2011 zooage

Muppet Master once again shows how small minds are fooled by the NeoCons and Baggers. As a troll, he has no clue as to how much oil we have, he just quotes his masters lies in a lame attempt to blame everything wrong in America on the Dem's. and Obama. Who does he think gave the permit to BP to drill their failed well? The Bush Regime did. Our technology is maxed out when we are drilling that deep. We will have more such spills in the future. And if will be the fault of those that say de-regulation is what America needs to build a strong economy and stop "Gob'ment inervenshun". That would be the Baggers and the GOP. To finish, please learn how to spell, or use Spell Check. You will be taken much more seriously when it doesn't look like a 10 year old is posting it.

Flag It | Permalink 2:28 pm, Mar 10, 2011 cryptoad

Another article written by an over educated City Slicker who has no concept of what is really happening out here in the heartland. Mark my words!

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 7:29 am, Mar 10, 2011 AlanD2

Luckily, whatever is happening in the heartland has little effect on most Americans, cryptoad.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 10:49 am, Mar 10, 2011 Master of Muppets

only in your elitist liberal microcosim of a world - in the real world the heartland is a much bigger part of America than trolling city slickers like yourself.

Flag It | Permalink 12:56 pm, Mar 10, 2011 bcaldwell

Don't panic, Karabell????? OK I won't, but what about the specs out there freaking out over what is going on in Libya when the supply is very high? Maybe you should tell them not to panic and pass the panic prices onto the rest of us. We are already seeing the effects of higher oil prices in terms of food prices and other consumer goods. Couple that with an increase dollar supply thanks to Helicopter Ben and his money dump via QE I and QE II and you have inflation and prices starting to affect real people. In the real world , out here in flyover country, people use their cars to get to work, for work , to get food, to get the kids to school and to get them to extra-curricular activities. But, an increase of almost 40 cents a gallon in about three weeks is no big deal- right???? And to think you actually get paid to write this stuff.

Flag It | Permalink | Reply 8:10 am, Mar 10, 2011 Emerson Bigguns

Does higher education equate to lower common sense? Seriously.Rising oil prices are the seed of future inflation.Everything we purchase at the market of our choice arrived at said market via truck.When the trucking companies have to pay more for fuel to run their rigs, they pass that cost on to producers who in turn pass it along to consumers.It's not rocket science.It's economics 101, and with Mr. Karabell's resume, one would think he would be aware of that.File this effort under nonsense.And move on.

Flag It | Permalink | Reply 8:21 am, Mar 10, 2011 clearthinker

Where was this article back in 2008 when everyone blamed Bush for high gas prices?

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 8:33 am, Mar 10, 2011 beastyjay

Remember the rule: Obama only gets credit; and never responsibility. Obama will throw a hissy fit and tell you how stupid you are if you disagree...

Flag It | Permalink | Reply 10:16 am, Mar 10, 2011 Thinkermom

The rise in oil prices is due to oil speculators and Wall Street traders...there is no shortage of oil, even Iraq is generating more oil in past 20 years. Why is there not at least a transaction tax placed on trades that may help to cut down on speculative trades and help our deficit? Traders are getting richer on the backs of ordinary Americans. We thought Obama would do something about this after the run up in 2008 to approx. $150 barrel, but no. The Republicans won't do anything. Here is a very informative short video.... http://www.cnbc.com/id/15840232?video=3000009227&play=1

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 9:22 am, Mar 10, 2011 cryptoad

I would bet the farm that the big oil companies are controlling under the table enough speculators in the market place to push the price of crude to whatever price they want at any given time. Pretty smart one their part, since no one can no longer point the finger at the oil companies anymore about the price of oil, they just say they are selling at market price.

Flag It | Permalink | Reply 9:44 am, Mar 10, 2011 beastyjay

"We thought Obama would do something about this after the run up in 2008 to approx. $150 barrel, but no. The Republicans won't do anything." ?!?! You know Obama is a Democrat, correct? And that the Democrats still control Washington? And that the Democrats passed 'Wall Street Reform'? And that the Democrats are restricting drilling permits?

Flag It | Permalink | Reply 10:13 am, Mar 10, 2011 barrylane

flyoverland "As the resident educator of elites on the real world..." And that means what, in English, please?

Flag It | Permalink | Reply 10:07 am, Mar 10, 2011 chalmers

Whenever a Democrat is in the WH somehow high gas prices are no big deal. Have a Republican in the WH with high gas prices and the world is ending. It' the same with hunger and poverty. It some how doesn't exist except when a Republican is elected.

Flag It | Permalink | Reply 11:03 am, Mar 10, 2011 Sojourneron

Time to move to alternative energy. One way motorists can reduce if they cannot eliminate dependence on oil completely is with cars like this that run on compressed air: Air Pod http://www.mdi.lu/english/airpod.php

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 11:35 am, Mar 10, 2011 AlanD2

Electric or hybrid cars seem a more likely alternative, Sojourneron.

Flag It | Permalink | Reply 12:49 pm, Mar 10, 2011 KarmaPolice

"The ones who will suffer the most from rising oil prices are the ones who have the least impact on the economy." Absolutely correct. As the richest 5 percent of Americans account for 40 percent of consumer spending.

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