Over at Bloomberg, Caroline Baum makes mostly good sense:
Energy is a hot topic, as anyone who's been even semi-conscious for the past year knows. Too bad it's so widely misunderstood.
Take, for instance, the "expert'' (on what, it's not clear) on TV yesterday morning who said "you either get tightening from the Fed or (from) oil markets.''...
Oil-producing countries, OPEC and non-OPEC alike, manage supply. When OPEC curtailed oil exports to the West in the 1970's, the result was sharply higher oil prices and sharply lower economic growth.
Such an outcome, known as a supply shock, is represented by an inward shift in the supply curve.
That isn't the situation today, where surging global demand -- an outward shift in the demand curve -- raised the price of U.S. light sweet crude to a record $58.28 this week.
While we can quibble over whether policy makers are trying to slow economic growth or just ease up on the gas, demand is their game, not supply.
Our TV expert assumes that a rise in the price of oil, no matter how induced, is the equivalent of higher interest rates...
Yesterday's Wall Street Journal didn't do much better in a front-page article on the Saudi offer to boost output.
First we are told that demand is growing in the U.S. in spite of high gas prices. Demand remains strong in China, India and Asia's booming economies.
The Fed plays in the adjacent ballpark. The central bank influences aggregate demand for goods and services in the economy by adjusting the overnight federal funds rate.
The conclusion? "Higher prices are slowing the world economy,'' the article said, before "supporting'' the conclusion with... forecasts of stronger demand. Huh?
I'm going to disagree a bit with the implication there. From the perspective of an oil-importing country, oil price increases represent, in part, an external shock to the cost of production. Such shocks do indeed have some of the flavor of a supply shock.
Here's a picture I find interesting.
As we entered the latest series of oil shocks in 2002, energy efficiency -- measured by the quantity of energy usage per inflation-adjusted dollar of GDP -- had fallen significantly from 1970s levels. Energy dependence -- measured by the gap between consumption and production per unit of GDP -- has, on the other hand, remained remarkably constant. That says to me we should not be so quick to dismiss analogies with the situation in the 1970s.
That said, I can't say I disagree with Ms. Baum's policy conclusion.
Consider this: If OPEC stopped pumping oil tomorrow, and prices soared to $105 a barrel, does that mean the Fed should lower the funds rate to 1 percent, increase the money supply and put its imprimatur on what would surely be the next stagflation?
Hardly. That would be the outcome if the Fed eased in the face of supply constraints.
How about looser monetary policy in the face of demand- driven higher oil prices? That wouldn't make much sense either, since cutting the funds rate would stimulate already strong demand.
UPDATE: Calculated Risk reviews the Department of Energy forecasts (although I'm guessing many of you may be visiting here from there.) Hat tip to CR as well, for pointing out a post at Angry Bear that provides some of the distributional detail behind the "what oil price will cause a recession" question in the Wall Street Journal survey I noted yesterday.
THEY JUST KEEP TICKING: Yet more at Calculated Risk and at Angry Bear.
AND MORE: CR is posting at AB.