October 02, 2002
From the desk of Jane Galt:In this article on the
In this article on the cost of the war by Robert Shapiro, which is fairly good, though I disagree that the war would have any noticeable stimulative effects on the economy, one paragraph jumped out:
But an actual interruption in crude from the Gulf would still send world oil prices sky-high. If the conflict wears on or, worse, spreads, the economic consequences become very serious. Late last year, George Perry at the Brookings Institution ran some simulations and found that after taking into account a reasonable use of oil reserves, a cut in world oil production of just 6.5 percent a year would send the United States and the world into recession. The price of a barrel of oil would rise to $75, a gallon of gas would cost $2.78, inflation would jump 5 points, and U.S. growth would fall nearly 3 percent. A 10 percent net cut in the world's supply of oil for a year would be very nasty: Crude would sell for as much as $160 a barrel, gasoline would cost nearly $5 a gallon, 15 points would be added to the inflation rate, and growth would drop 4.6 percent.
That's why Saddaam waging undeterred conventional wars of territorial expansion is a bad, bad, bad, bad, bad idea. 6.5% is nothing compared to the contraction he could achieve -- profitably, for him -- with the Gulf in his pocket.
And please, before you send me your chirpy emails on the wonders of conservation: this is not 1973, thank you very much. The low hanging fruit of conservation has already been picked. Also notice that it took years for, for example, the auto fleet to turn over. Just because gas is $5 a gallon doesn't mean that people will suddenly be able to stump up 20K for a new car. Right now the only reason compacts are so cheap is that the automakers subsidize them heavily in order to achieve their CAFE numbers, which are based on the average of all cars sold. It's not because the cars cost so much less to make; labor, overhead, and marketing are by far larger expenses than the materials in the car. If demand for SUV's goes off a cliff, the price of compacts will rise a lot. Not to mention that its hell getting three kids and a dog into a Beetle.
Conservation is not going to achieve, say, a 10% reduction of demand for petroleum instantaneously.
Posted by Jane Galt at October 2, 2002 06:22 AM | TrackBack | Technorati inbound links