iTulip regards IMF chief economist's view of oil / inflation link as specious?

[Rajiv]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

To highlight your concerns, I am linking to a very good article Growing Food When The Oil Runs out By Peter Goodchild

Most people in modern industrial society get their food mainly from supermarkets. As a result of declining hydrocarbon resources, however, it is unlikely that such food will always be available. The present world population is nearly 7 billion, but food supplies per capita have been shrinking for years. Food production will have to become more localized, and it will be necessary to reconsider less-advanced forms of technology that might be called "subsistence gardening."

The peak of world oil production ("peak oil") will be at some point in the early 21st century; it is quite possible that we are already past that event. The "peak" will be (or was) about 30 billion barrels of oil a year, but by 2030 annual production will be less than half that amount [2, 4]. Without oil and other hydrocarbons, there will be no fuel, no plastics, no chemical fertilizer. Alternative energy sources will do little to solve the problem [16]. Partly as a further consequence of declining oil supplies, electricity and metals will also be in short supply [8]. But in terms of daily life, the most important effect of oil depletion will be a shortage of food.

The effect of oil depletion on food is partly obscured by two separate but related issues: skyrocketing food prices and the great increase in biofuel production [6, 9, 10]. In the present chaos, however, to follow questions of money is to go on a wild-goose chase, while biofuel production can only be seen as a mad attempt to evade the problem of oil depletion while depriving the world of needed food.
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[c1ue]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Lukester,

I'm sorry, but you need to get a little bit of a life.

Most people are probably focused on Xmas and winding up 2007 business - as I am.

In a short response to your querulous complaints about the 'real' price of petroleum, my reply to you is this:

For your answer, first you must define the answer space (i.e. in whose terms and time frames)

For me, I look at the next 20 years - because that's all I am planning for. In the next 20 years, oil will not run out.

Yes, peak cheap oil may come, but I spend only 1% of my income of fuel, and likely the overall impact is less than 10%. So if this doubles from now, it would hurt but I can afford it. Honestly speaking, so could most of the United States.

Of course, in the process of accounting for this extra expenditure, I ( and the rest of the US/world) will spend less elsewhere. And that which I spend less on, is that which is higher on the hierarchy of needs - i.e. toys and other crap from China.

On the other hand, the cost of fuel (and also food - dependent on fuel cost), is more like 25% of the average Chinese budget - referring to transportation costs. With food, we're looking in the 75% area.

This number is certainly comparable to what Brazil and India have.

Thus your contention that peak cheap oil leads to inevitable commodity scarcity and in turn leads to asymptotic price increase spirals assumes that there is not a negative feedback mechanism between BIC growth and commodity costs, in fact you are assuming the opposite (positive feedback).

I don't agree. Higher fuel costs leading to higher food costs both in turn reduce 1st world demand for all sorts of crap, cheap or otherwise. Simultaneously higher fuel/food costs lead to inflation in BIC, which in turn reduces their competitiveness. Less competitiveness = less export profit.

Voila, a potential self regulating mechanism has now appeared.

Here's another possible self regulating mechanism: GCC countries produce very little food.

Check this out:

http://earthtrends.wri.org/pdf_libra...gr_cou_682.pdf

Net cereal imports and food aid as a percent

of total consumption {b}, 1998-2000
Saudi Arabia 72.9%
Middle East and North Africa 39.0%

One way to balance out the relative impact of GCC/OOPs on the world economy is to fight back with food cost.

Even with cheap oil, food production is difficult in GCC/OOP nations. While many decry the lack of global warming correctness in ethanol, from a different light it could be a very fine counterbalance to imported oil dependency. The USA and a relatively few other nations have the resources (i.e. open reasonably fertile land) to produce more food than is needed internally. By tightening food supplies through diversion into ethanol production, you get the twin benefit of increasing imports and decreasing reliance on imported oil.

The food leverage against BIC is just a bonus.

[bart]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Seems there are no contributors here with the slightest interest in nailing this issue to the floor?

I repeat my question - is there such a thing today, in 2007, as a rise in the real price of petroleum, and if so, how does it's increased real cost input into 80% of all goods and services worldwide not exert an upward pressure upon the CPI?? Answers to the effect that "it's complicated so there is no real answer", are mere evasions of the point.

Now turn around and notice iTulip treats this everywhere as a manifestation of monetary abuse alone. What do you think? Do you have your own ideas on this, as distinct from those you've read here?

I both reject your assumption that iTulipers believe that the oil price is caused by monetary issues alone, and also note that the question has been answered before... or at least I thought it had been.

The answer is unquestionably yes - there such a thing today, in 2007, as a rise in the real price of petroleum. Some of the cause of the level of oil prices is raw inflation, some is supply demand based and some is sentiment/speculation based... and in that order in my opinion.

And here's one applicable chart:





You apparently have some point you're trying to make or promote about non monetary or sentiment based causes and effects - how about clearly stating it? I'm unclear about what it is.

[grapejelly]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Grapejelly - you offered up a sweeping statment that oil prices have "nothing to do with" inflation. Would you care to substantiate it, or are you merely saying "trust me"??

If oil prices go up, there will be less money to spend on other things. Unless the money supply expands quicker than the underlying real economy, oil prices will not cause inflation. In fact they will cause other prices to fall as less money will be available to spend on other goods and services, which will lower demand for those and therefore prices.

Prices of oil-based products may rise, but that is not inflationary absent an increase in the money supply in excess of the underlying growth rate of the economy.

"Prices rising means more inflation" confuses causes and effects.

The price of oil may rise but that will put a crimp on other prices. It has before and it will in the future.

Except it won't because the money supply for each country is expanding so quickly these days.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Interesting comments there C1ue, but perhaps a little arid and devoid of ideas beyond your own personal survival?

My comments are within your text -

Lukester - ... you need to get a little bit of a life. ... Most people are probably focused on Xmas and winding up 2007 business - as I am. ... In a short response to your querulous complaints ...

A notable rediscovery of all aspects of "life beyond iTulip" - from one of iTulip's most prolific posters this year? As for my needing to "get a life" perhaps this apparent solicitude is more intended to scratch whatever itch you feel at the moment, than it is to express any solicitous concern? Such gratuitous popular slang comments cheapen your discourse C1ue.

... Yes, peak cheap oil may come, but I spend only 1% of my income of fuel, and likely the overall impact is less than 10%. So if this doubles from now, it would hurt but I can afford it. ...

I understand from your reply that the depth of your intellectual curiosity on the matter is governed by material effects upon A) yourself and your immediate family and B) your immediate (quite narrow) socio-economic class? My inquiry on whether there is such a thing as a rising real price of petroleum was not really interested in how I can be injured by it, or even profit from it. It was more an attempt to define a component of inflation, which inflation, you and others here apparently discuss very often anyway? I'm interested that you discuss other components of the topic elsewhere in very abstract terms of pure intellectual discovery, yet regress to it's sole importance to your personal life when I bring it up here for your examination? The fact that you and your family, and your narrow socio-economic class represent a fairly small subset of the global tribe of humans is delegated to a footnote in your observations. Here's an eye opener for you C1ue - I'm sure a large number of humans (2+ billion spending 50% of their income on food alone) elsewhere would "vote you down by a clear majority" in this discussion, as your evaluation seems curiously lacking any dimension of thoughts on the topic beyond your own personal survival. So ironically, along with the gratuitous suggestion that I should "get a life" it appears you have offered a response curiously devoid of even a token, pro-forma concern for 3 billion other lives in the topic in question?

... On the other hand, the cost of fuel (and also food - dependent on fuel cost), is more like 25% of the average Chinese budget - referring to transportation costs. With food, we're looking in the 75% area. ...

"With food we are looking at 75% area" - Now you are waking up a little, but your insights are suddenly aborted in this direction ... I noted with some astonishment your idea of an "ethanol driven market solution" to allow "market place efficiencies" to fight back at the oil producers by redirecting massive sections of agriculture to ethanol with the express intention of producing further soaring prices in foodstuffs!?? Brilliant! You'd make a great Napoleon, as you seem to regard all those people for whom 75% of income goes to food and fuel as a handy cannon fodder for your plans to stick it to the oil producers! An astonishing suggestion.

... Thus your contention ... assumes that there is not a negative feedback mechanism ...

Actually all I was attempting to ascertain was whether a rising real price of oil is theoretically able to at least initially exert strong upwards pressure on global CPI indexes. An idea which seems wholly uncontroversial on first glance, but which you have lots of strenuous objections about.

Your "marketplace feedback mechanisms" - as regards the potential for massive imputed food inflation, seem to pertain to the theory of "the efficiency of the markets" (a construct with which you seem quite enamoured) which is a paradigm which apparently breaks down in any humane terms, in a world where there is no adequate "next fuel" for humanity to progress to beyond petroleum yet. In the absence of a "next fuel" what you have is merely plain old "harsh impact", the old "ripe tomato splat" eventuality - which renders your market based "negative feedback mechanism" to a corrolary of a much larger geologic event.

International projections call for a 30% shortfall in petroleum extraction vs. consumption ratios, over the next thirty - forty years? Sounds duly cautious and conservative as an estimate, if we are already at the limit of oil production rates in a furiously industrialising world? This suggests your self regulatory "negative feedback mechanisms" can be read instead as a callous euphemism for "massive economic (human) damage", which your comment suggests is corrected back to some happy equilibrium by the "efficiency of the markets"? Ayn Rand prescriptions for a global energy and food emergency? Sounds morally threadbare as a solution to me. Example: Put a man in an oxygen chamber and reduce the oxygen - and "voila"! [a favorite C1ue aphorism] - your prescription is that he should "breath less" - a tried and true "negative feedback mechanism" applied to the human cannon fodder (one or two billion of the little third world "human critters" spending 50% of their earning on food) standing between your market based solution and the "renewed balance" brought to your emotionally desiccated, statistician's inspired oxygen consumption timeline? Could it be this is a standardized academic's response applied theoretically as a band aid to a 500 year anomalous event?

... Higher fuel costs leading to higher food costs ... reduce 1st world demand ... Simultaneously higher fuel/food costs lead to inflation in BRIC, which in turn reduces their competitiveness. ...

ok, now we have C1ues "marketplace efficiency" working a wondrous demographic change upon the citizenry of Saharan Africa, Western China, Bangladesh, etc. ! Very efficient indeed!

... Voila, a potential self regulating mechanism has now appeared. ...

Inspired global planning - to guide us through a spiraling food-price scenario ...

... One way to balance out the relative impact of GCC/OOPs on the world economy is to fight back with food cost. ... By tightening food supplies through diversion into ethanol production, you get the twin benefit of increasing imports and decreasing reliance on imported oil. ...

C1ue - I have to say it - I am grateful your visions of a global solution to peak "cheap" oil will make little headway with governments at large, as I think you adopt what might be described as a "combine harvester" mentality regarding all the people in question (spending 50%+ of their income on food today) who have nowhere near your range of choices to escape the process unscathed.

On a humane level, you have chosen to adopt a "gnat's eye view" of the challenges to humanity. Any animal can fend for itself, as they are bred for millennia to learn the art of individual survival. The primary distinction of humans above animals is not their ability to become highly educated, it is their ability to act in a polity, which implies, as an essential ingredient, a minimum of compassion. To some people, that "compassion" component is indeed the characteristic of "having a life", as opposed to not having one.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Grapejelly -

I have great respect for your hard headed and elegantly simple interpretation of the causes of future inflation. I say this with all the sincerity I can communicate.

Indeed, in a strict sense your defnition seems exact. The observation I make is that I was not ever seeking to "redefine inflation" - I was limiting myself, very carefully to pointing out that (as Bart confirms, and I thank him for the clarification) there is indeed a very real increase in the (real, inflation adjusted) price of petroleum ongoing, and it therefore follows clearly, that this exerts a notable upward push to the CPI in many countries worldwide. That's it.

All the arguments as to why this get's "self regulated" by money being subtracted from other areas of the global economy are secondary. Why are they secondary in this case? Because in this case, you are talking about the most essential commodity for industrial continuation, for continuing industrial growth paradigms, on the planet, which this scenario envisions going into a permanent state of continuing decline. Therefore to fall back upon "self regulating markets" panaceas is a rather weak market euphemism for some serious disintegration of industry and GDP's, unless viable (equivalent energy output) energy technology can be found and rolled out globally in the largest infrastrcture transition in history. Yes, that really is what is implied by the later iterations of "Peak Cheap Oil".

In this environment, "market regulatory mechanisms" which can and do apply in most other economic scenarios, are simply dwarfed, and engulfed, by the event of what "iTulip prefers to term as Peak "Cheap" Oil.

This trend, in ten or twenty years, upsets all paradigms going back two hundred years in industrial society. "Market Regulatory Mechanisms" is an officious sounding misnomer for "desperate rearguard actions to mitigate highly damaging and systemic conventional energy shortages". We should mince no terms in grasping n 2007, that all the "Jetsons cars and homes" futuristic dreams we comfortably indulge, of optimistic technological advance are at this hour still merely notions. As present day global industrial infrastructure exists - it is ALL still geared entirely to hydrocarbons.

This approaching condition implies, if one gets one's thinking out of the "business as usual" rut, a large global shock to GDP. It quite clearly implies that an implacably soaring energy input cost into 80% of global GDP will back governments into a corner - where they must employ the peacetime equivalent of "wartime economics" (massively inflationary) to A) undertake a very, very, very costly global re-tooling to decouple from primary reliance on hydrocarbons merely to survive, and B) provide highly accomodative liquidity worldwide to attempt to mitigate some of the harsh destructiveness of sharply rising energy input costs in practically all goods and services.

You note: << Except it won't because the money supply for each country is expanding so quickly these days. >>

I agree, and all I'm noting is that what is rapidly approaching in petroleum real price rises will force this money supply issuance even further. Why is that remotely controversial? Dwindling oil will "cause" governments to beget further inflation. Governments do not issue inflation for no reason. Their inflation issuance is a response to actual national conditions. Soaring energy input real costs will in time become a major component of those pressures upon government abuse of currencies.

Due to the above, there will persist an inexorable link between progression upwards of real petroleum prices, and the price of Gold.

If oil prices go up, there will be less money to spend on other things. Unless the money supply expands quicker than the underlying real economy, oil prices will not cause inflation. In fact they will cause other prices to fall as less money will be available to spend on other goods and services, which will lower demand for those and therefore prices.

Prices of oil-based products may rise, but that is not inflationary absent an increase in the money supply in excess of the underlying growth rate of the economy.

"Prices rising means more inflation" confuses causes and effects.

The price of oil may rise but that will put a crimp on other prices. It has before and it will in the future.

Except it won't because the money supply for each country is expanding so quickly these days.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

DemonD & Spartacus -

This must be the peanut gallery? Pleased to meet you folks! Keep up the good work here peanut tossing!

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Bart -

Great chart, thanks.

My entire suggestion is that if the real price of petroleum rises over the coming years, the cost of all goods and services with energy input values will rise in lockstep with that real energy cost rise. That's it.

This is not a "what is inflation" question. It is a "what will powerfully affect the CPI worldwide" question. If this effect persists and grows in future years (potentially even the next 2 decades as oil dwindles) you can impute a powerful "emergency" stimulus upon government monetary responses - worldwide.

That was my point.

reject your assumption that iTulipers believe that the oil price is caused by monetary issues alone ... The answer is unquestionably yes - there such a thing today, in 2007 (as a real inflation adjusted rise in the price of oil) ... What is your question ... how about clearly stating it? I'm unclear about what it is.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

FRED -

Just to clarify matters finally, on the < Petroleum price > CPI linkage > being real, vs. imaginary - Is there any chance of obtaining an unequivocal "position statement" from iTulip on the ongoing increases in the real price of petroleum (which can be presumably extended out a decade or more from now, given peak "cheap" oil being a secular trend) exerting a consistent upward push on the CPI of many countries over the following decade?

If true, this would be a significant implication / input to add to the general inflationary stew?

[bart]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Bart -

Great chart, thanks.

My entire suggestion is that if the real price of petroleum rises over the coming years, the cost of all goods and services with energy input values will rise in lockstep with that real energy cost rise. That's it.

This is not a "what is inflation" question. It is a "what will powerfully affect the CPI worldwide" question. If this effect persists and grows in future years (potentially even the next 2 decades as oil dwindles) you can impute a powerful "emergency" stimulus upon government monetary responses - worldwide.

That was my point.

Cool, and its clear now - thanks.

My $.02 worth is that "cost-push" inflation does exist as a concept but is secondary to the initial creation of the money, and that a lack of supply as in "peak oil" in the future will likely have a large effect.
As a rough rule of thumb over many decades and items, I believe the 80/20 rule applies. In other words and in my opinion, about 80% of all price increases are due to inflation alone.

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Bart -

Is past documented history of the monetary inflation component of oil prices likely to provide a reliable model to measure any pricing component ratios in a future "terminal depletion" scenario?

By definition, it would appear any "one-time event" such as a one-time global petroleum depletion (gradually starves an industrial world of it's required fuel) does not provide any clear prior precedents sufficient to model the future pricing trajectory of the event?

I find it hard in a terminal resource depletion scenario, to imagine that merely 20% of it's value will remain derived from scarcity. Do you have any reservations on the above pricing components in such a depletion scenario?

[bart]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Bart -

Is past documented history of the monetary inflation component of oil prices likely to provide a reliable model to measure any pricing component ratios in a future "terminal depletion" scenario?

By definition, it would appear any "one-time event" such as a one-time global petroleum depletion (gradually starves an industrial world of it's required fuel) does not provide any clear prior precedents sufficient to model the future pricing trajectory of the event?

I find it hard in a terminal resource depletion scenario, to imagine that merely 20% of it's value will remain derived from scarcity. Do you have any reservations on the above pricing components in such a depletion scenario?

This is where it gets extremely dicey with price predictions. You're of course right that the 80/20 rule is only general and that oil will likely violate it, but when and how much is so very key.

Also, tell me about when and if energy breakthroughs will be made.

Seen any stats on how many more fluorescents have replaced tungsten bulbs within the last year?


What about the effects from a Manhattan type project, either for a new energy source or for building pebble bed reactors and converting cars to batteries?

I'm also not at all certain that there are no historical precedents - whale oil comes to mind and I'm sure there are others too.

In other words, the dark scenarios are in no way guaranteed and my long term $250-350+ target price is nothing more than a semi-educated guess and extrapolation based on all factors including supply & demand and inflation etc.

And besides, they still burn witches who accurately predict the future at the stake, don't they?... ;-)

[Guest]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

Bart -

They don't burn witches any more.

They tried to arrange a bonfire for Nixon but he got a pardon from that Ford guy. Besides he was a guy, so burning him at the stake would have offended traditional witch burning enthusiasts. Ever since then the enthusiasm for the practice has just kind of faded out. Madeline Albright might have made a good candidate though!

Quoted from Colin Powell's memoirs:

“What’s the point of having this superb military you’re always talking about, if we can’t use it?”

... as remembered in Colin Powell’s memoir. Powell wrote that he almost had an aneurysm, he was so upset. [abcnews bio]

[c1ue]

Re: iTulip regards IMF chief economist's view of oil / inflation link as specious?

A notable rediscovery of all aspects of "life beyond iTulip" - from one of iTulip's most prolific posters this year? As for my needing to "get a life" perhaps this apparent solicitude is more intended to scratch whatever itch you feel at the moment, than it is to express any solicitous concern? Such gratuitous popular slang comments cheapen your discourse C1ue.

Sorry, GRG has passed me long ago. I spent 30 minutes or less on iTulip every day or two - more interval if I'm travelling.

I'm not the one posting comment after comment deriding a lack of response to a self-posted provocative world inflation spiral caused by peak cheap oil.

Here's an eye opener for you C1ue - I'm sure a large number of humans (2+ billion spending 50% of their income on food alone) elsewhere would "vote you down by a clear majority" in this discussion, as your evaluation seems curiously lacking any dimension of thoughts on the topic beyond your own personal survival.

Thank god I'm not a politician and don't have to depend on the votes of others. I not someone who says: "Let them eat cake", but neither am I the person responsible for feeding/housing/educating them either.

I'm not sure how convincing everyone else that peak cheap oil is here counts toward your global karmic balance.

As for personal survival - again the point was that the United States does not spend a large percentage of its income on oil. While painful, rising oil prices WILL NOT itself cause America to circle the drain. In fact, rising oil and other commodity prices will FIRST cause OTHER nations to start circling the drain, or at least start large numbers of their populations to go hungry.

Therefore I am actually serving a societal benefit: all those poor people who can't afford a computer - take notice. Start a farm or you're going to get hungry should Lukester's scenario unfold.

International projections call for a 30% shortfall in petroleum extraction vs. consumption ratios, over the next thirty - forty years?

Projections aren't generally not worth crap. If projections were true, I'd be living on Mars (1967), dead of starvation (1973), Communist (1950), or one of millions of possibilities.

Consumption patterns change. Oil is NOT oxygen; oxygen is something which cannot be replaced. Oil, on the other hand, makes things easier.

While easy is what we all want (?), as I noted above in the 1st world ultimately it is still affordable even at $200. The same cannot be said for most of the rest of the world.

On a humane level, you have chosen to adopt a "gnat's eye view" of the challenges to humanity. Any animal can fend for itself, as they are bred for millennia to learn the art of individual survival. The primary distinction of humans above animals is not their ability to become highly educated, it is their ability to act in a polity, which implies, as an essential ingredient, a minimum of compassion. To some people, that "compassion" component is indeed the characteristic of "having a life", as opposed to not having one.

On the contrary, I am not the one tunnel visioned into a world where oil, food, and commodity prices are every day increasing.

I am not the one envisioning aerial advertisements of Chinese and Indian companies/products like the Japanese ads on the floating vehicles in 'Blade Runner'.

I have plenty of compassion, but I am not here to be a spokesmodel for UniCEF.

You wanted to know if your scenario can happen - I answered with several possible reasons why they cannot.

If you cannot understand that governments are 100% capable of doing these types of actions in order to maximize benefit for their populations, then you are hopelessly naive.

As for compassion, I still don't see how your (financial and emotional) investments in peak cheap oil and gold through the roof make you any more compassionate than I.

Or are you planning an Andrew Carnegie with your prescient fortune? You'll buy food for all the poor 3B people you speak of?

Where is your 'compassionate solution' to this terrible outcome you foresee so strongly? In contrast to my own: here's what I can control, here's what I'm doing.