You guys think there’s any basis to his arguement? or are some of these guys in top position that far out to lunch? I can’t seem to make any sense of his logic, but i’m just fresh grad, so… http://www.financialpost.com/story.html?id=929937 CIBC’s Rubin blames high oil prices for economy’s nosedive Economist refutes oil bull’s latest theory CIBC World Markets chief economist Jeffrey Rubin has a new theory about what really sunk the world economy – high oil prices. In a report to clients Monday, Mr. Rubin argues high oil prices don’t seem to get enough blame for the current mess, even though they were the trigger in four of the past five global recessions. The latest run-up in oil was so huge, with real oil prices rising 500%, Mr. Rubin said they had a far bigger impact on the economy than the financial crisis. “The run-up in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock. And those oil shocks produced two of the deepest recessions in the entire post-war period, including the 1980-82 double dip,” Mr. Rubin said. “By any benchmark the economic cost of the recent rise in oil prices is nothing short of staggering, a lot more staggering than the impact of plunging housing prices on housing starts and construction jobs. And those energy costs, unlike the massive asset writedowns associated with the housing market crash, were borne largely by Main Street, not Wall Street, in both America and throughout the world.” But University of Calgary economist Frank Atkins said Mr. Rubin’s analysis is plain wrong and inconsistent with his previous views. There is no evidence that past recessions were caused by oil prices, Mr. Atkins said. Rather, the 1981 and 1991 slowdowns were caused by monetary policy that hiked interest rates to fight inflation, while the current slowdown started with the housing crash in the U.S. that eventually clogged the financial market, Mr. Atkins said. “The inconsistency in his story is that he had oil prices going to US$200 and the TSX going over 15,000,” Mr. Atkins said. “He did not have in his original speech oil prices destroying the economy.” According to Mr. Rubin, oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, to economies that have the highest savings rates in the world. For example, the transfer of income from U.S. consumers to Saudi producers involves moving money from a zero-savings-rate economy to one in which the savings rate is around 50%, he said. “In effect, the income transfer from American motorists to Saudi Aramco means that more and more of the world’s income gets saved and less and less spent,” Mr. Rubin said. The good news is that if triple-digit oil prices were the real culprit, now that they are down to the US$65 a barrel range they are leading the way to a recovery, Mr. Rubin said. Close Presented by
It’s the kind of thing economists love to argue about, i.e., “don’t seem to get enough blame”. That’s a little flaky for me to argue about. Did high oil prces contribute? Sure. Did they cause our problem? Not by themselves.
That seems strange. Really we’ve just shifted from one constraint on the economy (higher oil prices) to another (lack of liquidity, and possibly lack of capital). In fact, it is debatable whether higher oil prices were really constraining things substantially. It’s possible that extra payments for fuel and energy were covered by going further into debt, and that raised credit spreads. But the credit mess really started in the housing sector, and substantially before oil prices really went wacky. I’ll agree that oil prices might have had some effect, but there’s no indication I can see that they were the main cause of anything related to where we are now. If it were, the substantial drop in prices should be making everything run better right now.
Rubin’s thoughts would have been a lot more useful if he had published them when we had $150 oil. But when oil was at $150 he was calling for $200 oil, not a recession. Probably a spurious correlation.
Rubin is one of the sharpest minds out there. I remember him predicting the canadian dollar to reach par with the US dollar and oil reaching $100 several years ago.