Last year’s fourth-quarter rise in GDP wasn’t as strong as initially estimate, the U.S. Bureau of Economic Analysis reports. That’s discouraging for all the usual reasons, along with the fact that the economy needs all the momentum it can muster if there’s an oil-shock coming, courtesy of the turmoil in the Mideast.
As for the last three months of 2010, the U.S. economy grew at an annual rate of 2.8%–down from the initial estimate of 3.2%. Why the haircut? “The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports,” according to BEA’s press release.
Every new data point from here on out will be filtered through the prism of oil prices. Until the Mideast calms down, at least in relative terms, the threat of higher crude prices will be lurking behind every number with the not-so-subtle reminder that higher energy costs at some point are a headwind to growth. Are we at that point? Probably. The good news is that oil prices have stabilized in the mid-$90/barrel range in New York this morning, after breaking north of $100 yesterday. But events on the ground in Libya and elsewhere in the Mideast don’t offer much confidence for predicting that energy prices won’t spike again. The political upheaval coursing through the region almost surely has legs.
The recent surge in energy prices inspires the questions: Have we reached the point of demand destruction? That’s the title of today’s research note from the energy analysts at Bernstein Research. It’s a good question, since even oil demand is elastic. Higher prices eventually inspire lower consumption, which helps drive prices lower. According to Neil Beveridge and Liang Zhang latest analysis on that point:
From peak to trough of the last cycle, demand destruction was almost exclusively centered on developed economies which bore the brunt of the financial crisis. In OECD markets oil demand dropped from 50 to 45mmbls between Q4 2007 to Q2 2009 accounting for almost all of the decline in global demand. Given that increased unemployment was a key factor behind demand destruction in OECD countries, it seems unlikely (unless unemployment becomes meaningfully worse) that we will see the same levels of demand destruction in the west, even at current prices.
What happens in emerging markets, which now account for 50% of global demand, may be more important this time round. For a number of reasons, emerging market demand tends to be more GDP sensitive than price sensitive, partly because of greater industrial demand for oil but also partly due to the use of subsidies. Although China and India have reduced fuel price subsidies through reform of fuel pricing, 60% of oil demand in India remains subsidized and refining losses have started to appear again in China as oil prices spike. In Malaysia and Indonesia gasoline and diesel prices remain heavily subsidized and will increasingly act as a drag on these economies. Credit to Vietnam however, who raised their fuel prices by 24% last week, which should have some impact on demand.
For the moment, the main risk is less about oil and more about uncertainty generally. As Time reports today:
…there’s a growing sense that the Middle East region, which has the planet’s biggest oil reserves, has been made deeply unstable by the revolutions in Tunisia and Egypt, and the uprisings in Libya, Bahrain and Yemen. Says Amrita Sen, an oil analyst for Barclays Capital in London: “The question now is, Who is next, Algeria?” Algeria, a major oil producer bordering Tunisia and Libya, has long been viewed by North Africa watchers as ripe for revolution, having been ruled by autocrats since the military canceled elections in 1991. Oil companies, which sign long-term production and revenue-sharing contracts with governments, have been shaken by the political uncertainty sweeping the region. They’re asking, says Sen, “Who are we going to deal with? Who is going to come to power?” That uncertainty pushes up prices, which in turn slows the global economic recovery.