Saturday, September 10, 2005

$70 Tank of gas

What will cause the next recession?
The rule of thumb is that for every $10 rise in the price of oil, you will see a loss of about 0.4% of GDP. Thus the recent rise in energy is enough to slow down the economy but not enough to push it into recession. Yes, nine out of the last ten recessions have been associated with rising oil prices. But nearly all of those were supply driven. Today's rise in oil prices are demand driven. Prices are rising because demand in the US, China, India and everywhere else in the world is rising. Rising demand is because the world economy is relatively strong. And that is a good thing.