Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Sunday, September 04, 2005

How Much Will US Energy Crunch Affect Europe?

Sean and JJ sent me this article from Reuters UK:

BERLIN (Reuters) - The head of the West's energy watchdog said in an interview on Saturday that Hurricane Katrina could spark a worldwide energy crisis if damage to U.S. refineries led to a big increase in U.S. purchases of European petrol.

"If the crisis affects oil products then it's a worldwide crisis. No one should think this will be limited to the United States," Claude Mandil, head of the Paris-based International Energy Agency (IEA) told German daily Die Welt.

"They are already buying gasoline in Europe. If the refineries are damaged, that will only increase. Then this will become a worldwide crisis very quickly."

This is a form of "arbitrage", and the effect is to move scarce resources from lower-valued uses to more highly-valued uses, as measured by willingness to pay. It helps explain why gasoline prices have jumped in Canada, too.

Rest assured, it will become more of a crisis (requiring more bureaucrats, of course) if the market system is not allowed to function fluidly.

Meanwhile, in the US, the Joint Economic Committee issued a report on the expected economic impact of Katrina. Here are just three of its points [ht to econopundit]:

o Potential effects of heightened energy costs on consumer spending, which accounts for roughly 70% of GDP, present an increased risk of a significant slowdown in economic growth in coming quarters.
o Katrina-induced energy price spikes have sharpened the focus of consumers and businesses on already-elevated energy prices. Prices in long-dated energy futures suggest that elevated energy prices are expected to be more than just a temporary phenomenon.
o To the extent that persistently elevated energy prices are born out in the future, we will increasingly see purchasing patterns in consumer durable-goods spending and business investment spending change, with substitutions occurring away from relatively energy intensive goods toward more energy-efficient goods.
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