Are Federal Fiscal Policies Keeping Oil Prices High?

Thanks to sluggish growth in the U.S. and problems in the eurozone, Americans shouldn’t see price spikes at the gas pumps this summer. Still, U.S. officials can’t say that oil prices are something they can’t control.

But Joseph Mason, a banking professor at the Ourso School of Business, Louisiana State University, and a Senior Fellow at the Wharton School, says that’s an excuse for inaction. “Oil prices are currently being buffeted by an imbalance between supply and demand,” he says. “But that imbalance has also combined with current U.S. monetary policy to cause a variety of perverse effects in U.S. markets that are worsening, rather than alleviating, price pressures.”

Mason is the author of The Perverse Dynamics of Long-Term Low Interest Rates: Evidence from Oil Prices, in which he argues that U.S. fiscal policy “continues to aggravate [oil supply] imbalances by increasing pressures on global demand abroad while pushing away domestic production.”

“In the short term, reducing the inflationary bias in Federal Reserve policy and improving the quality of the U.S. energy infrastructure can help bring down prices,” Mason writes in the paper, which was sponsored by the Small Business & Entrepreneurship Council.

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International Energy Forum Official: We Will Continue to Live in the Age of Hydrocarbons

The American consumer might get some relief at the gas pump this summer. A sluggish U.S. economy, prolonged fears about the eurozone, and U.S. crude supplies reaching a 22-year high have all contributed to a downward trend for crude oil prices. Much of the pricing of oil in recent months has to do with geopolitical factors, says Aldo Flores-Quiroga, the recently elected secretary general of the Riyadh-based International Energy Forum. He speaks with Arabic Knowledge@Wharton about fears over oil prices and supply amid further sanctions on oil producer Iran, and the impact of continued outages at energy producers.

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In A Fight Over Hormuz, Gulf Economies Would Be ‘Very Exposed’

The Hormuz Strait is only 21 miles wide at its narrowest point. With shipping lanes only 2 miles wide to ferry a fifth of the world’s oil trade, it is a choke point in all senses of the word. If closed or blocked, attempts to reopen the strait would concern all of the world’s powers.

The obvious implications of any closure of the Hormuz Strait are stark. According to the U.S. Energy Information Administration, almost 17 million barrels of oil were transported daily through the Strait last year, representing nearly 20% of global oil trade. (Most Gulf oil exports now head to Asia.) A number of analysts predict prices for oil would jump 100%.

Closely neighboring Iran, most of the Arab Gulf countries would find themselves at risk and their economies under pressure. Instead of benefiting from a windfall from sudden increases in the price of oil, they would be dealing with increased security and logistical costs, a fleeing expatriate workforce, flight of investment capital and a squeeze on resource demands.

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Nobel Laureate Finn Kydland on the Global Economy’s Biggest Challenge

Since winning the Nobel Prize for economics in 2004, Finn Kydland has continued to refine his ideas, and says one of his theories regarding how governments plan policy has now become relevant in the wake of the global economic crisis.

“I think the biggest challenge is the lack of predictability of government policies,” he tells Arabic Knowledge@Wharton. “It has different facets. The theory with which I’m associated with is called the inconsistency of optimal government policy, or the time inconsistency, I should say.

“So what it says is even in the case of a benign government who’s trying to maximize welfare, the present value of its citizens’ welfare — imagine we can measure that — the resulting optimal plan is time-inconsistent, in the sense that there will always be this temptation to change in the absence of a commitment mechanism to make sure that it’s carried through over time. There will always be a temptation to change that plan, and if they continue to do so, theory suggests that that could be quite harmful to society.”

Read the full interview here: http://bit.ly/vD9DzC

 

Talal Abu-Ghazaleh, Renowned Arab Businessman and Philanthropist: Western Economies Will Copy the Arab Model

Ailing Western economies are going to adapt to the Arab model, says Jordan-based business leader Talal Abu-Ghazaleh, adding that the deepening economic crisis in Europe and a prolonged recession in the U.S. will do little to prevent the growth of Middle East economies.

Abu-Ghazaleh, who has made his name into a business brand catering to a host of corporate functions around the world and philanthropic initiatives in the Middle East, does not buy into the idea that the Arab world will be largely affected by further bad economic news from the West. “While there will be a minor shrinkage for the need for oil in the West, that will be more than made up by the greater need in emerging economy countries,” he says. “Still, I don’t think we will see fewer cars being driven, fewer airplanes and lesser demand for electricity in the West. Only a margin of shrinkage will be in the needs of factories.

“I remember the words of former U.S. President George Bush Jr. when the crisis started. He said, ‘We’re in this together and we will come through it together.’ Nonsense. We did not go into this together. This was a crisis precipitated by Wall Street. It was not precipitated by the stock exchange of Cairo, or of Delhi or Shanghai. This was a crisis by the financial markets of the U.S. and of Europe because of the partnerships between Europe and the U.S. There are no partnerships between the West and Arab world. There are markets, and the cheaper the goods are the better it is for our economies.”

Read the full interview here: http://bit.ly/uxw0WC

Energy Innovation is Both Costly and Difficult

The sad reality, says Christian Terwiesch, Wharton operations and information management professor, is that “in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.”

Since the oil crises of the 1970s, no solution has been found that provides society with a practical alternative to fossil fuels. Terwiesch and other scholars say there are a number of reasons why, including the fact that oil as an energy source is not only practical, it has an entire infrastructure built around its use. But by far the biggest hurdle to alternative energy innovation is that oil wins as a simple matter of cost.

Read the story here: http://bit.ly/hPSVeg