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Tim Worstall: Oil Price Disaster? Why doesn't this slow the economy? I don't get it. I realize you can take the entire extent of my knowledge of economy and put it in a closet and still have plenty of room for all your extra books, winter clothes and the Michigan State Marching Band, but this seems to be a pretty straight forward thing to me, and I just cannot figure it out.
  1. People/corporations use gas/oil
  2. Gas/oil goes up in price
  3. People/corporations have less money to spend on non-gas/oil
  • Economy suffers
No? Enlightenment welcome.
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3 responses
You are correct. It will slow the economy. From the post of mine you link to:
"So while we may be facing a short term pain in the wallet and slightly lower growth, oil at current prices is not the end of either the oil age or the capitalist system."
The point I wanted to make, and obviously did not, is that the current rise in oil prices is not the end of civilisation. It costs, yes, it's a pain in the rear, yes, it causes changes in behaviour, yes.
End of the world, no.
You are exactly and perfectly correct that the economy will suffer. My only argument is "how much".
— Tim Worstall
Thanks for replying! All your points came through loud and clear, actually, but even with the GDP being made up of just 2% by crude, we are more dependent on oil today than ever. And while I don't think it's the end of the oil age or anything, shouldn't we see oil requiring heavy industries suffering costs as high as 2x or 3x what they were 1 year ago? With hedging and options on crude, you could mitigate this effect, but it's impossible to ignore that what cost $25 a 1.5 years ago is now $50.
— Iron Yuppie
That's exactly the point. Costs doubling in 2% of the economy is a pain. 30 years ago we had costs doubling in 8% of the economy. That is, amazingly, 4 times as much pain. So, all other things being equal (which of course they are not but leave that to one side) we would expect the current "oil crisis" to be about 1/4 th of the pain of the 1970's one. The other things equal bit being that one, we're not going to be so stupid as to have price controls and rationing and two, we've got a bog strategic reserve to dip into if it looks like getting really bad.
— Tim Worstall
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