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Saturday, March 5, 2011

The 2011 oil shock

Oil and the economy


More of a threat to the world economy than investors seem to think












THE price of oil has had an unnerving ability to blow up the world economy, and the Middle East has often provided the spark. The Arab oil embargo of 1973, the Iranian revolution in 1978-79 and Saddam Hussein’s invasion of Kuwait in 1990 are all painful reminders of how the region’s combustible mix of geopolitics and geology can wreak havoc. With protests cascading across Arabia, is the world in for another oil shock?
There are good reasons to worry. The Middle East and north Africa produce more than one-third of the world’s oil. Libya’s turmoil shows that a revolution can quickly disrupt oil supply. Even while Muammar Qaddafi hangs on with delusional determination and Western countries debate whether to enforce a no-fly zone (see article), Libya’s oil output has halved, as foreign workers flee and the country fragments. The spread of unrest across the region threatens wider disruption.
The markets’ reaction has been surprisingly modest. The price of Brent crude jumped 15% as Libya’s violence flared up, reaching $120 a barrel on February 24th. But the promise of more production from Saudi Arabia pushed the price down again. It was $116 on March 2nd—20% higher than the beginning of the year, but well below the peaks of 2008. Most economists are sanguine: global growth might slow by a few tenths of a percentage point, they reckon, but not enough to jeopardise the rich world’s recovery.
That glosses over two big risks. First, a serious supply disruption, or even the fear of it, could send the oil price soaring (see article). Second, dearer oil could fuel inflation—and that might prompt a monetary clampdown that throttles the recovery. A lot will depend on the skill of central bankers.
Of stocks, Saudis and stability
So far, the shocks to supply have been tiny. Libya’s turmoil has reduced global oil output by a mere 1%. In 1973 the figure was around 7.5%. Today’s oil market also has plenty of buffers. Governments have stockpiles, which they didn’t in 1973. Commercial oil stocks are more ample than they were when prices peaked in 2008. Saudi Arabia, the central bank of the oil market, technically has enough spare capacity to replace Libya, Algeria and a clutch of other small producers. And the Saudis have made clear that they are willing to pump.
Yet more disruption cannot be ruled out. The oil industry is extremely complex: getting the right sort of oil to the right place at the right time is crucial. And then there is Saudi Arabia itself (see article). The kingdom has many of the characteristics that have fuelled unrest elsewhere, including an army of disillusioned youths. Despite spending $36 billion so far buying off dissent, a repressive regime faces demands for reform. A whiff of instability would spread panic in the oil market.
Even without a disruption to supply, prices are under pressure from a second source: the gradual dwindling of spare capacity. With the world economy growing strongly, oil demand is far outpacing increases in readily available supply. So any jitters from the Middle East will accelerate and exaggerate a price rise that was already on the way.
What effect would that have? It is some comfort that the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil-intensive. Inflation is lower and wages are much less likely to follow energy-induced price rises, so central banks need not respond as forcefully. But less vulnerable does not mean immune.
Dearer oil still implies a transfer from oil consumers to oil producers, and since the latter tend to save more it spells a drop in global demand. A rule of thumb is that a 10% increase in the price of oil will cut a quarter of a percentage point off global growth. With the world economy currently growing at 4.5%, that suggests the oil price would need to leap, probably above its 2008 peak of almost $150 a barrel, to fell the recovery. But even a smaller increase would sap growth and raise inflation.
Shocked into action
In the United States the Federal Reserve will face a relatively easy choice. America’s economy is needlessly vulnerable, thanks to its addiction to oil (and light taxation of it). Yet inflation is extremely low and the economy has plenty of slack. This gives its central bank the latitude to ignore a sudden jump in the oil price. In Europe, where fuel is taxed more heavily, the immediate effect of dearer oil is smaller. But Europe’s central bankers are already more worried about rising prices: hence the fear that they could take pre-emptive action too far, and push Europe’s still-fragile economies back into recession.
By contrast, the biggest risk in the emerging world is inaction. Dearer oil will stoke inflation, especially through higher food prices—and food still accounts for a large part of people’s spending in countries like China, Brazil and India. True, central banks have been raising interest rates, but they have tended to be tardy. Monetary conditions are still too loose, and inflation expectations have risen.
Unfortunately, too many governments in emerging markets have tried to quell inflation and reduce popular anger by subsidising the prices of both food and fuel. Not only does this dull consumers’ sensitivity to rising prices, it could be expensive for the governments concerned. It will stretch India’s optimistic new budget (see article). But the biggest danger lies in the Middle East itself, where subsidies of food and fuel are omnipresent and where politicians are increasing them to quell unrest. Fuel importers, such as Egypt, face a vicious, bankrupting, spiral of higher oil prices and ever bigger subsidies. The answer is to ditch such subsidies and aim help at the poorest, but no Arab ruler is likely to propose such reforms right now.
At its worst, the danger is circular, with dearer oil and political uncertainty feeding each other. Even if that is avoided, the short-term prospects for the world economy are shakier than many realise. But there could be a silver lining: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon. The 1970s oil shocks transformed the world economy. Perhaps a 2011 oil shock will do the same—at less cost.

Harvard Says It Will Allow the R.O.T.C. to Return

March 3, 2011


CAMBRIDGE, Mass. — Nearly 40 years after Harvard expelled the Reserve Officers Training Corps program from its campus, university officials announced Thursday that they would officially recognize the Naval R.O.T.C.
Harvard was among several prominent colleges that banned the R.O.T.C. amid the movement against the Vietnam War. More recently, the program drew criticism on campuses because of the armed forces’ policy on gay men and lesbians in the military. Now, two months after President Obama signed a repeal of the “don’t ask, don’t tell” policy, some colleges are inviting R.O.T.C. back.
Harvard will formally recognize Naval R.O.T.C. in an agreement to be signed Friday by the university president, Drew Gilpin Faust, and the secretary of the Navy, Ray Mabus.
“Our renewed relationship affirms the vital role that the members of our Armed Forces play in serving the nation and securing our freedoms, while also affirming inclusion and opportunity as powerful American ideals,” Dr. Faust said in a statement.
Since the repeal of “don’t ask, don’t tell,” presidents of other universities have publicly expressed interest in bringing back the R.O.T.C., which has units on more than 300 campuses nationwide.
Under the agreement, Harvard will finance the Naval R.O.T.C. program and provide access to athletic fields, classrooms and office space.
Harvard students have been allowed to participate in the program, but they had to go to the Massachusetts Institute of Technology to train. That arrangement is expected to continue.
Harvard’s program will not go into effect until the “don’t ask, don’t tell” repeal is effective, which will be 60 days after the president, chairman of the Joint Chiefs of Staff and secretary of defense certify that policies and regulations are in place and military readiness will not be affected.
The university is in discussions with other branches of the military about reintroducing R.O.T.C. programs, officials said.
“N.R.O.T.C.’s return to Harvard is good for the university, good for the military, and good for the country,” Secretary Mabus said in a statement.
Aubrey Sarvis, executive director of the Servicemembers Legal Defense Network, said Harvard’s decision should be impetus for the repeal to become effective.
“This announcement should be incentive for the Pentagon that repeal should be in place before kids return to Harvard and other campuses this fall,” Mr. Sarvis said. “We welcome the return of R.O.T.C. on more college campuses.”

The new new normal

America's recovery


Mar 4th 2011, 15:15 by G.I. | WASHINGTON
THE phrase “new normal” is usually used to explain the persistence of underwhelming economic data, such as today’s employment numbers. Non-farm employment rose 192,000 (or 0.1%) in February from January, but that was after a sluggish, weather-depressed 63,000 gain in January (which was revised up from 36,000). Over the two months employment advanced an average of 127,500, in line with the last five months.
Many economists will say that 127,500 is just a neutral number, only enough to keep up with population growth. This, then, is the new normal: an economy that grows only fast enough to keep unemployment from rising, not strong enough to create the jobs needed to bring unemployment down.
The only problem with this story is it’s not an accurate description of reality. The unemployment rate is falling: to 8.9% in February from 9.0% in January and 9.8% last November. For some reason, we seem to be able to get unemployment down with far lower rates of job creation than in the past. Why?
There are two possible explanations. First, blame the data. Non-farm employment is derived from a big survey of employers, while the unemployment rate is derived from a much smaller survey of households. The two often diverge. Indeed, measured by the household survey (adjusted for population controls), employment has risen an average of 419,500 in each of the last two months, more than triple the rate of the payroll survey. That’s why the unemployment rate has fallen.
However, I’d be careful before chalking it up to the data. Such differences are common. Household employment is extremely volatile and big swings tend to cancel each other out over time. Since March of last year when the job market bottomed out, employment growth has averaged a little over 100,000 per month according to both surveys.
This suggests we need a second explanation for why such unimpressive job creation has succeeded in pulling down unemployment. The labour force, the share of the working-age population that either works or wants to work is growing at a strangely subdued rate. Participation (the share of the working age population in the labour force) is supposed to rise during recoveries as previously discouraged workers return to the job hunt. Instead, it’s fallen, to 64.2%, unchanged from January and down from 64.9% last March.
Perhaps employers are reluctant to hire given their ability to squeeze more out of their existing work force. After all, initial unemployment insurance claims continue to drop, evidence that layoff activity has slowed, and manufacturing overtime hours jumped to 3.3 hours in February, the highest since early 2008.
But if lack of hiring were the problem we should see it show up in either the actual or hidden unemployed. In fact, the U-6 unemployment rate fell to 15.9% in February from 16.1% in January and 17.1% in September. This figure includes everyone who is officially unemployed plus everyone who wants to work but either has given up looking, didn’t look that month, or is working part time but would prefer full-time work.
So if the new normal was slow growing employment, the new new normal is a slow growing labour force. Put the two together and the unemployment decouples from the overall health of the economy. Why? Perhaps the Great Recession has permanently diminished work opportunities for big swathes of the work force, in particular prime-age men. Perhaps America is now experiencing an echo of what older Europe and Japan already have: a demographically driven slowdown in potential growth. Or perhaps it’s one of those temporary statistical mysteries that will disappear soon.
Enough dreary long-term analysis. There were lots of good short-term signs in the report suggesting that the recovery, though hardly a barn-burner, is intact. Manufacturing employment continues to outperform, rising 33,000 or 0.3%. Total private employment was up 222,000; state and local payrolls dropped 33,000. The average workweek was unchanged at 34.2 hours. 
Hourly earnings did not grow, so the yearly increase fell back to 1.7%. Even if gasoline is about to lift inflation, it’s hard to see a wage price spiral developing.

Wisconsin budget crisis inspires national ads


By Angie Drobnic Holan
Published on Friday, March 4th, 2011 at 5:36 p.m.
National groups are starting to weigh in on the budget controversy in Wisconsin via political ads.
A ad from two Democratic advocacy groups says that Republicans in Wisconsin are waging war on the middle class by taking money from workers and giving tax breaks to corporations. 
"Money is being taken away from workers, and the tax breaks given to major corporations,"  says a worker in the ad. We decided to fact-check that claim and rated it Mostly True. We found that workers are being asked to give up money from their paychecks while companies are offered tax breaks. The tax breaks are connected to job creation, though, not corporate size. (Read the complete item.)
We're still working on a fact-check of an ad from the Republican National Committee that urges people to "fight back" againstPresident Obama and "his union bosses." We'll update this story with that fact-check once it's complete. 

Republican War On Working Families

Uploaded by  on Mar 1, 2011
Help put this on TV:https://secure.actblue.com/contribute/page/waronworkingfamilies?refcode=youtube This ad was launched March 2, 2012 by the Progressive Change Campaign Committee (PCCC) and Democracy for America -- airing in Madison and Milwaukee, Wisconsin. It was created by GumSpirits Productions (Aaron Duffey and Jim Cole).

The Spirit of Wisconsin

  This article appeared in the March 21, 2011 edition of The Nation.