Obama’s Fiscal Stimulus No Substitute for Cheap Oil

Posted by Jeff Rubin on September 22nd, 2010 under SmallerWorld • 6 Comments

There is nothing intrinsically wrong with President Obama’s earmarking $50 billion for new transport infrastructure, or extending the Bush tax cuts to low- and middle-income American households—provided the country can afford them. But already burdened with a record budget deficit of over one trillion dollars, most Americans probably think Washington’s already done far too much for the economy as it is.

After all, there seems precious little to show for all the fiscal stimulus. The US jobless rate seems stuck at around nine and a half per cent, and the GDP remains miles below its pre-recession peak. And although the economy is indeed growing, its pace is a shadow of past recoveries, and a fraction of last cycle’s growth rates.

It’s those very economic failings that compel the White House to try to bring even further stimulus to bear on the US economy. But implicit in this strategy is the belief that today’s economy can be force-fed more government spending and tax cuts to achieve yesterday’s rate of growth.

What’s being overlooked is that last cycle’s rate of growth was fueled for the most part with cheap oil—oil was below $30 a barrel for the first half of the period. Even today’s oil prices weren’t encountered until the last year of growth. That’s not incidental to the performance of the world’s largest oil-consuming economy, which relies on imports for over half of its 19-million-barrel-a-day requirement.

Feed the US economy cheap oil, and you’ll see robust growth rates and a drop in the jobless rate to four-decade lows—no matter who’s in the White House. But throw in $147-per-barrel oil, and the US economy stops dead in its tracks.

Unfortunately, President Obama can’t bring back the cheap oil prices that fueled most of last cycle’s growth. The recent BP disaster in the Gulf of Mexico probably drove the final nail into the coffin of the last frontier of untapped domestic supply—deep water.

He may be able to get oil from Canadian tar sands (provided the Environmental Protection Agency approves Transcanada’s proposed Keystone XL pipeline) before China can siphon it off through the competing pipeline Enbridge wants to build to the west coast. But even if he is able to secure tar sands fuel for American motorists, the price of that oil will have to be very near triple digits or it won’t flow in nearly the quantities needed.

The age of cheap oil is over, and that means recalibrating the speed limit for the world’s largest oil-consuming economy. In a world of $75–per-barrel to triple-digit oil prices, the US economy is not likely to grow more than by 1 to 2 per cent per year until it can curb its oil appetite significantly.

Trying to substitute fiscal stimulus for cheap oil won’t make the American economy grow any faster. It will just make an already record-sized deficit that much bigger.

  • http://www.businessinsider.com Gus Lubin

    Hi Jeff,

    We'd love to run your column at Business Insider. May we?


    Gus Lubin

  • liquidsnake2010

    Of course, printed or digital money can only sustain the illusion that energy is still available in the quantities expected. I think the stimulus is essentially the inital stages of hyperinflation, as if the physical shortages increase, there will be a lot of money chasing a lot less energy.

    I dont buy the end of the world nonsense, but i think the absolute brainwashing of society through mis use of propaganda techniques for consumerist purposes, and suppression of fundamental knowledge about reality such as sacred geometry, has left people so uneducated about things that any attempt to inform them is met with derision, because it contradicts the brainwashing.

    I will always endorse hemp as a basic resource for humanity, anywhere it grows on this planet, as its too useful to ignore andits health benefits are supreme. It really says something that the plant that enables the United states to be discovered, is actively sought out and eradicated in the wild by institutions at great cost to the taxpayer.

    Slowing down the speed limit is a good idea, however, it would slow down productivity as people would arrive at work later, deliveries would be later etc etc. I say tackle the 'root' cause, and 'supplant' 'crude' oil with hemp oil.

    Love and Gratitude

  • Jasonlong33

    Good Job Jeff

  • Rojelio

    What do you mean by “I don't buy the end of the world nonsense”. ?

    Could our empire be declining because of dwindling energy reserves, too many entitlements, and an oversized military that takes astronomical proportions of the public treasury yet is no longer capable of victory? An examination of history shows us a perfect textbook example unfolding before our eyes.

    If you mean that our fiat currency is not about to collapse, then look closely through at the 4000 other examples of this and see that we have another perfect textbook example taking place right now.

    If you mean that our way of life isn't about to change because we can't drive, fly and send 18-wheelers everywhere as easily, think again.

  • Rojelio

    Jeff, you've got to be one of the best speakers I've ever heard.

    I'd sure like to see your videos pop up all over the internet to get your message out rather than in this blog that no one seems to read. Gerald Celente seems to have a pretty good model for this with lots of radio seeming to help out.

  • Peter Breedveld

    Living in Alberta and following the oil sands story for a few years I have noticed one thing. If the oil sands grows at a fast pace like it did when oil was over $100 per barrel costs of projects costs seem to sky rocket.

    Their is a limit to how fast the oil sands can grow to meet demand. I think that is because the labour pool in Fort Mac is not big enough to meet demand so companies start bidding against each other for employees and other resources when things get too hot.

    So if oil goes over $140 per barrel this competition for labour and other inputs will probably make it more expensive to develop the oil sands. This means that the oil sands can't provide much price relief.