EPCA 2006: Expect US recession, possible oil supply shock: Krugman

Monte Carlo (Platts)--25Sep2006

The world has seen high oil prices before, but the latest spike is very
different from those seen in the 1970s, economist and syndicated editorial
columnist Paul Krugman said Monday in a speech at the 2006 EPCA conference.
Most notably, the current oil price spike was not due to a supply shock, as it
was in 1973 and in 1979, he said. Rather, this time it is a demand shock,
driven by explosive growth from emerging markets.
"There has been no global recession, there has been no downturn, -- and
this has been something of a surprise," he said. He also noted that US oil
consumption was far less in intense today than it was in the 1970s and 1980s.
This is because the US economy shifted away from manufacturing to favor
the service industry. In 2005, more people in the US were employed by health
care companies than in manufacturing. "That means that oil shocks are not as
big of a deal as they used to be." In addition to reduced oil intensity, low
inflation rates and a more stable macroeconomic environment also kept the
effect of oil shocks to a minimum.
However, the US leads in the world in capital spending, and borrowing,
which created a delicate balance for its economy. In 2006, companies with a
surplus of oil-derived money were loaning it to the US. What the US was doing
with the money, Krugman said, "is not reassuring."
US spending is currently dominated by the housing market. "The US people
are buying and selling each other houses with money borrowed from China and
Saudi Arabia," Krugman said. In the past several years -- especially as oil
prices rose -- housing prices doubled in some US regions (notably the Pacific
Coast). The question of whether this was a bubble has begun to be answered in
the second half of 2006, as some markets saw housing starts fall 25%. "The
bubble is popping," he said. "This is not a soft landing. We are in the midst
of a spectacular destruction of the US housing market."
The effect of a US housing market slump would likely cause a significant
drop in the US dollar, although Krugman noted that most banks are betting that
it won't.
This scenario could cause a recession in the US and other other-addicted
nations, particularly if there is an oil supply shock -- a possibility that
Krugman thinks should be expected. While the notably outspoken editorialist
said that he wished to refrain from discussing politics, "it's easy to imagine
(a supply shock) because we get most of the world's oil from autocratic,
corrupt regimes, for the most part."
--Kathy Hall, kathleen_hall@platts.com; Ilana Djelal, ilana_djelal@platts.com


 

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