Thank God Al Greenspan is gone.

[ocschwar]

Al Greenspan went to speak to Congress. (Can't find link. It was June 7th, for the Committee on Foreign Relations.) Some of the points he made are interesting. He admitted that Saudi excess oil production capacity is now a negligible factor in the oil factor, just as American excess capacity disappeared in 1971, and that the major stabilizing factor in the market is hedge funds buying a stake in the market, particularly for long term futures.

So far, so good. But like so many economists, Al gets stupid. Oh, how stupid. It burns. It hurts.

Al points out that our oil per dollar GDP rate has gone down. Yes, Al, very nice, but there is a corollary. It means the dollars GDP lost if we don't get the oil, has gone up. Way up.

He points out that we have moved a lot of manufacturing offshore. Yes, Al. But we pay for the manufactured goods we import. Some of those goods are things we actually need, as opposed to blinky shiny baubles. And as energy prices go up, so do the prices of our imported goodies. All we get out of the deal is a little low pass filtering.

He points out that hedge fund managers have a big influence on the price of oil. No, Al. That is not the case. On the 21st of every month trading ends and delivery begins. Every month, hedge fund managers unload their stake in this month's contracts and trade them for longer term futures. By the 21st, the price is set only by those who drill for it and those who refine it. You can look at the graph. There is almost always a drop in price from the 15th through the 21st. And it's always small.

He claims that the price of oil will drop as soon as hedge fund managers have confidence in more oil production coming online. Yes, Al. And my stock in florist wholesalers will rise on the day the Pope marries. Hedge fund managers do better due dilligence than consultants, which is what you are now, Al. They know there isn't going to be any capacity coming online for some years. Look at the oil futures time spread.

Why must economists be so dumb? Why? Why? Why????

Comments

[thomb.livejournal.com]

Al points out that our oil per dollar GDP rate has gone down. Yes, Al, very nice, but there is a corollary. It means the dollars GDP lost if we don't get the oil, has gone up. Way up.

no, it certainly does not.

[ocschwar.livejournal.com]

Eh?

[thomb.livejournal.com]

take a simplified case. The GDP of Fooland is 2, and it takes two barrels of oil to produce that GDP. The oil/GDP ratio is 1.

Now, Fooland worries about their dependence on oil. So much work is spent identifying more efficient uses of oil to make stuff, and in developing other sources of energy. Half the energy needs are now met by other sources of energy, and, to boot, they need half the energy to produce units of GDP. So now, to make their same 2 units of GDP, they are using only 1/2 barrel of oil. (they can't just make 8 units of GDP with 2 barrels, because oil is not the only economic input, of course. the others clamp the total GDP. or rather, because these are fungible commodities traded on a market, the GDP goes up a little bit, but not much.)

Fooland's domestic production of oil is 1 barrel, so before, they were importing one barrel per year. For each lost unit of oil import, they lost a unit of GDP. Bad news! Indeed, this is why they started their new energy program. Because now their entire energy needs are met by the 1 barrel of local production. A decrease in available oil imports doesn't affect them at all. Indeed, it's good, because it means that the half barrel of oil they can sell will be getting higher prices on the world market.

[ocschwar.livejournal.com]

One of your assumptions is that "not getting oil" is a proposition that can be proofed against by relying only on domestic production. Thomas, meet Katrina & Rita. Katrina, Rita, this is Thomas.

Another of your assmptions is that the rise in GDP/barrel comes in part from substition from oil to other sources altogether. Proves your point if fooland is doing that. For values of fooland equalling the US, doesn't apply enough.

IOW, you're right categorically, but not in the case of the US.

[thomb.livejournal.com]

i was speaking of the logical validity of your argument.

what i am saying, therefore, is that you must know why the ratio of oil to GDP has dropped to know whether this is a good thing. but what you said was not that Greenspan gave insufficient details to know whether this was good; you said that he was stupid because it was obviously bad.

Another of your assmptions is that the rise in GDP/barrel comes in part from substition from oil to other sources altogether.

no, this is not correct. increases in efficiency have the same effect. if we need half as much energy to make the same number of widgets, then a drop in oil availability has half the effect it would have had before the improvements in efficiency.