Micro Project



Micro Project

Oil prices are going up this month

Background of the Situation

As 2008 will go down this year will be marked as the highest market volatility in terms of oil prices.  Crisis after crisis seemed to hit us like a continuous barrage of waves from the ocean of economic news.  The housing market continued to collapse resembling a housing market so weak, we have to go back to the Great Depression to find a similar time.  The credit markets are still in complete disarray.  $50 trillion in global wealth has evaporated in one year.  The automakers have fallen on tough times and emblematic symbols of American manufacturing like GM and Ford stand steps away from being dismantled.  In 2008 we also saw the incredible oil bubble peak and burst so dramatically that it caused many to pause.

We need to rewind a few months to get our mindset around the energy issue.  During the Presidential campaign, the theme of energy was so important that it commonly found its way into the stump speeches of all politicians.  Keep in mind that oil at this time was flying over $4 a gallon and consumers felt there was simply no ceiling for prices.  Every day as people drove by their local gas station all they needed to do was roll down their window, glance up at the big font price, and the probability was high the price was higher than yesterday (Hooker, 2002). 

It is also the case that much of the auto sales numbers have collapsed in tandem with the oil bubble yet it would be a mistake to completely attribute the oil burst with the collapse in the U.S. automakers.  If oil prices were the main culprit, U.S. automakers should be back in full speed with oil now trading at $36.50 a barrel.  This massive market volatility is unseen and very few people have been alive to live through such a volatile moment.  At this point, we rely on historical data and precedent and hope that we can learn from our past errors.

Today we are going to examine the impact of collapsing oil prices on the overall economy.  We will look at the impact it has on consumer inflation, auto sales, and also consumer spending. 

Impact on Inflation

When we look at oil prices in terms of consumer inflation, we now realize that this is one of the strongest components why the Consumer Price Index is collapsing and now we are on precipice of a dangerous bout of deflation.  The menace of deflation is that it renders any and all debts dangerous and a country as indebted as ours, simply cannot risk that prospect.  Let us look at the most recent data from the BLS regarding the CPI (Hamilton, 2003):

It is incredible to think that transportation is running at a compound annual rate of -48.1 for the previous 3 months and energy is collapsing at -69.3.  The unadjusted 12-month data is even more telling.  -8.9 for transportation and -13.3 for fuel.  What does this mean?  Energy and transportation have ...