Even more pain at the pump this year

I am usually loathe to predict what oil prices will do, certainly in the long term. As Yogi Berra famously said "it's hard to make predictions, especially about the future". But some pretty compelling evidence suggests another substantial upward tick in the oil price is coming in the second half of this year - on top of the already damaging current oil price shock.

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2007-08 oil shock caused "substantial" decline in New Zealand's GDP say Reserve Bank economists

In a recent report, two New Zealand Reserve Bank economists have estimated the real effects of oil price shocks on New Zealand’s GDP. The economists conclude --

1. a 5% permanent increase in retail fuel prices implies a decline in NZ's GDP of 0.3%
2. a succession of oil price shocks such as those in 2007-08 had "a substantial effect on real GDP in New Zealand"
3. New Zealand's oil use is different, leaving us more vulnerable to oil shocks. Faced with oil shocks New Zealand households and firms have only one third of the ability to lower the amount of oil they consume, compared with the United States.
4. real wages decline in response to an oil shock, as they are eroded by inflation.

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Next oil induced recession -- are we there yet?

Research in the US confirms that there is a strong correlation between high oil prices and recessions. Recessions emerge when oil prices reach around $US85 a barrel (currently $US115 a barrel) or when the aggregate cost of oil for the nation equals 5.5% of GDP.

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Starting to Join the Dots .... finally

Suddenly the world's media is awash with concern that the recent rise in oil prices will stall economic growth worldwide and cause another global recession. Guardian and here  BBC  Wall Street Journal

Finally, even in New Zealand, Brian Fallow economic commentator for the New Zealand Herald expresses concern about the implications for the New Zealand economy from rapidly rising oil prices.

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Ostrich-like Denial Continues

In August 2009 I wrote an opinion piece published in the New Zealand Herald - "Country Oblivious to Next Oil Shock". I opined that “the spike in oil prices to US$147 a barrel in 2008 helped trigger the global recession. And soon after a global economic recovery, the inevitable return to triple-digit oil prices will lead the world right back into recession.”
Back then the oil price was around US$70 a barrel – today Brent Crude is indeed over US $100 – in triple digit territory.

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