The Ripple Effect

This is why I think we have some tough economic sledding ahead as the full impact of the current oil price starts to ripple out:

Beyond gasoline: Prices surge for oil-based goods

New York – Besides gasoline, the Department of Energy calculates, there are 57 major uses of petroleum – everything from cosmetics to ballpoint pens, nylons, and even the waxes in chewing gum.

That is why the effect of high oil prices is now spreading well beyond the pump, where gasoline hit another record price of $3.98 a gallon on Wednesday. Now, consumers will have to brace themselves for other higher costs, since businesses such as Kimberly-Clark, Procter & Gamble, and Colgate-Palmolive are raising prices on their products to recoup energy costs.

In brief, this means less money in consumers’ pockets in the months ahead. But it also goes beyond consumers. For example, the price of asphalt is up 65 percent so far this year – and municipalities’ and states’ road departments are cutting back. This may mean bumpier roads ahead.

Most people don’t realize how many products around them are oil-derived. Oil prices have increased so rapidly that there hasn’t been time for the price of oil-based products to catch up.

We have already seen the airlines get hit hard, but we still haven’t seen the worst of that. Just today:

Continental Airlines to cut 3,000 jobs and 67 planes

Airlines, trucking, and auto sales are the early casualties of high oil prices, but you should brace yourself for higher prices on almost everything. I think the only thing that will prevent that would be an immediate collapse in oil prices back to the $50 range, but I don’t see that happening.

Note: I am flying to the U.S. tomorrow, and will be out of contact for a couple of days.

17 thoughts on “The Ripple Effect”

  1. No doubt, oil spikes hurt. But, the good news is the winds have suddenly changed. The WSJ asked 6/4if there is an oil “bubble” about to pop. Some energy economists (James Williams is one) are pondering if actual U.S. oil demand, down a little bit in 2006 and 2007, is down by several more percent, maybe even 5 percent, this year.
    Can a commodity sustain a record price spike in the face of falling demand? Even as production creeps up?
    And GM says it will have the Volt in showrooms by 2010. Wither world oil demand, when we can charge our cars at the plug, which is powered by nukes, gas, wind, solar, geothermal, hydro?
    You may want to buy puts…if oil ever tops $130 again, for sure.
    The last three weeks suggest the bull market excess is about to reveerse, and bigtime.

  2. Ouch. Huge turn. I can jinx any market. Use me as contrary indicator.

  3. let’s take the ripple effect a step further out to employment. Robert, in this, you are an early adopter by choosing a life in which you live apart from your spouse but close to your work. A friend of mine is faced with a similar albeit smaller scale version of this predicament.

    I apologize for having to “anonymize” this but if I specified gender of the two people in this family and city, this person would be recognized and employment opportunities could be compromised.

    in a conversation we had today, my friend told me that in their city, there were only four possible employers that could use their particular skills. the next city containing potential employers were about 45 minutes away and then the third city was about an hour away.

    Today, my friend could theoretically bear the cost of commuting and a second car (first one used by partner in travels to regional offices around the state). But if the cost of transportation climbs significantly, the distance my friend can afford to travel shrinks. Taken to its green extreme, my friend would have three options. Working for one of the four employers with even less bargaining power than is available today, changing careers and throwing away six years of undergraduate and graduate work as well as 20 years experience in the field, or choosing to live apart from their partner and spend time together only on weekends.

    at the core of this problem is increasing energy costs reduce choice. Product prices will increase because either the costs of transportation is very high or local manufacturer costs are very high because local markets are inherently tiny. With tiny markets, you get no economies of scale. with tiny job markets, you have downward pressure on wages leading to fewer people entering the field (which leads to employers calling for increased importation of foreign talent rather than paying a decent wage and attracting locals. But that’s a rant on a different topic)

    encase you haven’t recognized it, another side effect of increasing energy cost and the smaller reach it imposes on a person is the reason behind my disguising this person’s identity. If you have a small pool of employers and a unique set of skills, it’s pretty easy to figure out who is who and punish them for speaking out. Today, if I said I’d spent 20 years in software development and the five companies I worked for were completely ignorant of software development processes, I’d probably fit in with about one or 2 million other developers. But if you are in a pool of 10 or 20 candidates applying to four companies, don’t stick out!

    I understand that Robert needs to stick to the first and maybe second order effects of energy issues because that’s what he knows (and knows really well for which I am incredibly grateful), it’s important to some times speculate or play with a mental model about what other effects may show up in the social arena.

  4. Note the part about the price of asphalt. This underscores the point I have made over and over again: You can’t save motorized transportation by just finding new ways to propel vehicles. PHEVs, air cars, and whatever will be just as worthless as Hummers if the roads are not maintained. It’s not as easy as everyone thinks.

  5. China Coal-To-Plastics project to consume 10,000 tonnes of coal per day when complete.

    The petroleum used in most non-transport applications is low grade byproducts. If we process less crude for vehicles we’ll have less byproducts, and industry will simply move to other cheap hydrocarbon resources.

    When oil was cheap and plentiful we used it for all kinds of stuff because it’s a very convenient fuel. Space heating, electrical generation, industrial process heat, you name it. As oil got expensive we substituted other energy sources in most applications. The last application left standing is transport, and substitution is about to begin there.

  6. This spike is incredible. This price level will result in a drop of consumption similar to 1980, an 11 percent global drop…this time the demand drop may be permanent.
    Buy puts Dec. 2009!

  7. Benny, an 11% global drop means 20%-ish OECD drops because demand will continue to grow in ever-richer oil export nations and in China which has a bottomless pit of dollar reserves. I’m not saying a 20% drop can’t happen, but we’re nowhere near that point yet.

    However, I am happy to report EIA gasoline consumption numbers are FINALLY showing real declines. The monthly numbers seem to be picking up this decline better than the weeklies (Doug MacIntyre always did say monthly was more accurate). And even the most recent weekly number was down almost 4% vs. 1% drops in typical prior weeks.

  8. Benny,half the world has subsidized gasoline. That’s where demand is growing the fastest. I don’t think supply/demand has much to do with the increases anyhow. Oil is trying to keep up with the moon shot taken by other commodities. Natural gas is up over 65% year to date. Oil was up something like 22% before today’s spike. Some clown says we’ll see $150 soon,and oil spikes 10 bucks. Like magic…LOL.

    Investors lack confidence in paper currency. They’re converting those currencies to something fungible. Something that can be eaten or used to build….or makes things go. Take your pick.

  9. I remember mumbling something about this when I posted my reasons for not entering the automotive X prize. It did not take savant level thinking to see this coming. AZ has been postponing road projects and repairs since 2005.
    Regardless of oil dropping, we would(and are, mostly) fools to ignore which way the wind is blowing. If oil drops, and we do the same thing we did in 1980, look out! Personal transportation is certainly going to change, no matter what I believe.

    Benny, you seem quite married to a couple of positions. You might want to rethink it a little. I think I have a better chance of being drafted into the NBA, at 5’4″, than we do of gouging all that shale ‘oil’ out of CO.

  10. winelover,we can’t even drill in ANWR,because a polar bear might be forced to occasionally duck his head and ANWR has oil reserves comparable to Mexico. We can’t drill off Florida or California,because of what could maybe possibly might happen to someone’s beach. So you’re right. Not a chance in hell that oil shale gets developed.

  11. maury,

    I grew up in the black hills of south dakota. I was starting a business in deadwood, in 1987. The sister town to deadwood, is lead, home of the homestake mine. Lots of gold mining, to say the least. When I was starting there, there was a huge lobby in favor of heap-leach mining. The word then was that if it wasn’t allowed, that mining, and all the jobs associated with it, would leave. So, for a million dollar reclamation bond, companies were allowed to come in and set up. Forward to 2008. Even with gold at near record highs, the mines all left. Every single heap leach pad overflowed with ever rain, or leaked dumping dilute cyanide solution into the local creeks, and the water table. The mining companies left, leaving the million dollar bonds, while taking hundreds of millions in gold, and leaving future superfund sites behind. Having been to the Berkeley Pit toxic lake in MT, and having seen what letting logging companies have their way in the northwest, then leaving…I just have to say: Sooner or later, probably sooner, we are going to have to do something else. Should we tear up a lot of cool ground for such short term gains? I don’t have kids, so I should not really be ranting about long term anything. I don’t have to live with it. But everyone’s kids, and grandkids will. None of this has turned out the way that we planned, or the way it was presented. Should the same thinking be used to solve this problem? I strongly disagree. More so when it will by and large be used to allow Americans to consume even more. I hate to say, be we will probably have to fail, to succeed here.

  12. I’m living in AZ, the nation’s leading copper mining state and the place is littered with superfund sites that are abandoned mines. Every so often a kid falls down one of these abandoned mines to his death. How often do we have to be shagged up the bum before we say no thank you. There is renewed interest in copper mining with the recent rise in price but not in my state. The mining companies can go poison someone else’s back yard.

  13. “Should we tear up a lot of cool ground for such short term gains? “

    Why can’t we think outside the box here winelover? The oil locked up in shale deposits on federal lands in Colorado,Wyoming,and Utah is 3X what the Middle East has in oil reserves. Maybe we should ask ourselves what we’d rather the area look like if given a choice. What if we told oil companies they could uncover and process that shale if they left huge,pristine lakes behind? Or,have them create flat farmland. Or mountains even prettier than what stands there now. Anything is possible when you consider there’s $275 trillion worth of oil under that land. Just imagine what can be built with that kind of money.

  14. The “ripple effect” has two sides — oil-consuming westerners have less disposable income, but oil-exporting countries have higher disposable incomes. A lot of the long-term consequences of higher prices will depend on what the exporters choose to do with their additional income.

    Word from the Middle East is that Saudi & UAE are cooperating on a plan to build several nuclear power plants to meet burgeoning local demand for electric power. That is something all oil importers should applaud, since the alternative would be for Saudi/UAE to burn more of their oil locally & export less.

    Those oil importers who have something useful (eg nuclear power plants) to sell the oil exporters will do OK in a world of higher priced oil. Yes, there will be winners & losers in the west, but that is the nature of dynamic markets.

    On the other hand, those oil importers who have used the era of cheap fuel to build an immense unproductive administrative overhead (eg California, European Commission) are likely to suffer quite severely. But the defunding of the bureaucrats will ultimately prove to be a long term benefit for the poor suffering people of the west.

    High oil prices are good for human beings!

  15. Winelover–
    I think there was a guy named “Spud’ or something, who actually made it into the NBA at 5’6″…I have faith in you….work on that outside 3-pointer…
    As for shale, it is Shell, not me, that says they can pump shale for $30…my guess is that if gasoline goes much higher, the political wlll to develop shale rapidly will form….they already ruined Wyoming with gas drilling anyway….let that creep Cheney have a shale drill right up his rear end in Wyoming….
    Yes, I have faith in the price mechanism, and so far demand has wavered, but not really tanked…still, it is young yet in this price cycle…
    Demand from China may continue to grow, but they use only 9 percent of world oil….India is not growing…USA going down, OECD going down, Japan going down….the correction will take time, but it will happen….and demand declines tend to be long-term……permanent decines if prices stay up….we have seen Peak Demand in the USA, and I suspect the globe is not far behind…..

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