Econo-pundit-sage Nouriel Roubini is out with a new worry that high oil prices (and associated high gasoline prices) will send a "fragile" global economy back into recession. Actually, it's not so much a worry as an attention getting device for Roubini and I suppose I am feeding into that by writing about Roubini's newest prediction.

I have documented many of Roubini's past calls dating back to an original article I wrote about him in October, 2008, at the height of the recession when the news media began falling all over each other to give him air time. His predictions have been largely awful and anyone following his investing advice since then has taken a beating.

As I explained in my original 2008 article, Roubini had for many years (2004, 2005, 2006, 2007, and 2008) been predicting a recession. So, like a stopped clock, he would eventually be able to say he told us all so and was right! Since we have had recessions on average every four to five years, predicting a recession five years in a row and being wrong four times and "right" but once is an accomplishment that could be replicated by a novice or child.

Interestingly, in his 2005 recession prediction, Roubini similarly predicted that year's expected economic slide would be caused by rising oil prices.

Roubini's Latest Recession Call

In his recent writings, here's what Roubini is saying about high oil prices and the economic impact:
 

"Today's fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.

The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the US are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.

The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a fear premium."

 
For an economist, Roubini presents a shallow, poorly thought out analysis. Roubini erroneously states that oil supplies are plentiful but demand in the U.S. and Europe are lower. Oil production in portions of the Middle East and other OPEC member countries has been constrained. That's what cartels like OPEC are set up to accomplish. Demand is not down given the growing global economy, especially fast growing emerging economies.

Yes, oil prices are up but Roubini completely fails to mention that natural gas prices are way, way down thanks to the boom in production especially from the shale gas reserves in the midwest. Nearly six in ten American homes are heated using natural gas. And with oil prices up and natural prices are down, more folks are converting over to natural gas. (77 percent of the natural gas used in the U.S. is used in non-residential applications so Americans buying products and services benefit as well from low natural gas prices.)

Roubini's Strange Bedfellow: Bill O'Reilly

Much of Roubini's "analysis" is similar to what popular commentator Bill O'Reilly regularly asserts on his television program. O'Reilly asserts oil demand is down due to our recent mild winter weather so prices shouldn't be up. He doesn't seem to understand that the price of oil is set by global demand and he also fails to understand that oil demand domestically comes from many sources including industrial demand and not just home heating oil demand in particular sections of the country that enjoyed a milder winter!

Dr. Brian Russell who is a psychologist and attorney with an extensive business background and who also owns some small oil and gas properties, highlights a number of other problems with O'Reilly's thinking on the oil and gasoline businesses:

• Except for oil and natural gas located offshore and on federal lands like the Arctic National Wildlife Reserve (ANWR) in Alaska, America's oil/gas is NOT owned collectively by "we the people" as O'Reilly has said. It's the personal private property of individual Americans like me and my oil/gas legal clients...It's no different than if we produce wheat rather than oil/gas.  And, an oil company like Exxon is just a bunch of us individuals (shareholders) pooling money to produce or purchase oil/gas, here and elsewhere, and once the company produces or purchases that oil/gas, under current U.S. law, its property rights are no different than mine - the company can stockpile it, use it up, and sell it, any way and anywhere it wants.  O'Reilly may find that unpatriotic, but that's the way it is.
• More domestic production would help. Contrary to what O'Reilly has said, I think increased domestic production would likely stay here and be used here.  Yes, Exxon (and its competitors) might then just divert even more shipments of Middle Eastern oil from here to China, but in a global market, anytime you add to the overall supply, the price of a commodity comes down. China's already getting the oil that it wants at the current price.  If, for example, Exxon wanted to sell China more, it'd likely have to drop the price.  At that point, the higher bidders may well be here, in which case the ships head back here (I'm oversimplifying somewhat, but that's the essence of it).
• The profit margins on the sale of oil are not high. O'Reilly is correct that the major oil companies' total profits are at record highs, but that's because of the tremendous volume of oil being sold worldwide.  The profit per barrel of oil is a smaller percentage of the barrel price than the profit per unit on a lot of other products...

So, what's Russell solution to our high domestic gasoline prices? Here's what he advocates:

1. Permit more domestic production
2. Cut taxes on gasoline, temporarily at least
3. Cut domestic demand by conserving, which will have a price-suppressing effect
4. Individual Americans upset about the rising price of gasoline can invest in oil stocks

These are all excellent ideas to which I would add the fact that energy production on federally owned lands is down (see graph below from the non-profit Institute for Energy Research). The President is wrongly claiming credit for domestic production being up but that's happened because of production increases on privately owned land (like Russell's). If more exploration and production were allowed and encouraged on federally owned lands (which includes offshore), government tax revenue would boom and help shrink the large U.S. federal budget deficit. 






 

Copyright Eric Tyson, 2008 - 2013 all rights reserved.

Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.