Oil Price Da

STRAT SHEET:.............................................................................................................................................1 LINKS:.............................................................................................................................................................2 1. CAP-AND-TRADE........................................................................................................................................2 A. Cap-and-Trade increase gasoline prices by as much as 145%.........................................................2 B. Cap-and-trade and carbon tax have the same impacts on prices: they increase them.....................2 2. CARBON TAX...............................................................................................................................................3 A. Carbon tax would cause an increase of 7.73% in gasoline prices....................................................3 B. Carbon tax link...................................................................................................................................4 C. Carbon tax raises prices in British Columbia...................................................................................4 IMPACTS:.......................................................................................................................................................5 1. ECON GENERIC.............................................................................................................................................5 A. Oil prices cause all major recessions and current recession.............................................................5 B. Oil shocks should get credit for the recession....................................................................................5 C. Oil prices cause stagflation................................................................................................................6 2. ECON: MORTGAGE CRISIS..............................................................................................................................6 A. Oil caused mortgage crisis: homes farthest from urban core were the first to go, shows a correlation between commuting costs and repayment............................................................................6 B. Recession not caused by mortgage crisis: the timing is closer to an oil shock not mortgage crisis. 7 3. ECON: AUTO-MAKERS....................................................................................................................................7 A. Higher oil prices hurt the auto sector; lost .5% of GDP because of losses in oil sector because of oil............................................................................................................................................................7 B. High gasoline prices hurts SUV demand, specifically hurting big three...........................................8 4. ECON: INFLATION.........................................................................................................................................8 A. Oil prices empirically cause inflation................................................................................................8 B. Oil prices have empirically increased inflation.................................................................................9 5. ECON: CONSUMER SPENDING..........................................................................................................................9 A. Oil price increases hurt consumer spending......................................................................................9 6. ECON: TRANSFER MONEY TO HIGH SAVINGS ECON............................................................................................10 A. Petrodollar transfers end up in high savings economies meaning that less money gets spent........10 7. ECON: TOURISM.........................................................................................................................................10 A. Oil prices hurt 4/5 of the economy including travel(tourism) and agriculture................................10

Strat sheet: • • •

Use shell and extend. 1NC should just get a Link out and then a generic econ impact. Then later on you can really expand this DA with more impacts. The two strongest impacts, IMO, are the Mortgage crisis and Consumer spending. Stress these two because both of these things are important to judges. The impact of transferring money to other econs is also really good. Eventually I’d like to expand the impacts to include terrorism. I’ll also be updating this as I go, because there is a lot of good evidence out there on this issue.

Links: 1. Cap-And-Trade A. Cap-and-Trade increase gasoline prices by as much as 145% The George C. Marshall institute 2009 Bryan Buckley and Sergey Mityakov Clemson University The Cost of Climate Regulation for American Households The George C. Marshall Institute, a nonprofit research group founded in 1984, is dedicated to fostering and preserving the integrity of science in the policy process. The Institute conducts technical assessments of scientific developments with a major impact on public policy and communicates the results of its analyses to the press, Congress and the public in clear, readily understandable language. The Institute differs from other think tanks in its exclusive focus on areas of scientific importance, as well as a Board whose composition reflects a high level of scientific credibility and technical expertise. Its emphasis is public policy and national security issues primarily involving the physical sciences, in particular the areas of missile defense and global climate change. http://www.marshall.org/pdf/materials/636.pdf [CR] “Cap-and-trade will burden households with higher gasoline prices. Table 8 shows the percent difference between the baseline gasoline price and the cap-and-trade adjusted price. All models and scenarios demonstrate that Lieberman-Warner will increase the price of gasoline above the reference scenario price but with large amounts of variation. The CRA(Charles River Associates, global consulting firm) predicts that gas prices rise 145% above the reference scenario in 2015. Yet, prices are only 30% higher than the reference scenario in 2030 because the higher CAFE standards are included in the 2030 baseline. The lowest estimates are CATF’s(The Clean Air Task Force) and EPA’s core scenarios, predicting increases of 11.6% and 16.7% by 2030, respectively. Alternative scenarios using higher-cost assumptions show increases from 41.2% to 145% by 2030.”

B. Cap-and-trade and carbon tax have the same impacts on prices: they increase them American enterprise institute May 26, 2009 Kevin A. Hassett American Enterprise Institute Aparna Mathur* American Enterprise Institute Gilbert E. Metcalf Department of Economics Tufts University and National Bureau of Economic Research “The Consumer Burden of a Carbon Tax on Gasoline” http://www.aei.org/docLib/Consumer %20Burden%20AEI%20WP%20147.pdf [CR] “In discussions over how best to address climate change issues, there are essentially two market-based approaches that are being considered, a carbon tax and a cap and trade system. In this paper, we focus on the effect of a carbon tax on gasoline to reduce carbon dioxide emissions, though our results essentially carry through for a cap and trade program as well.4 A carbon tax is essentially a market-based instrument that creates a cost to emissions by directly taxing the carbon content of fuels. In the case of gasoline, this is essentially a tax on petroleum.”

2. Carbon tax A. Carbon tax would cause an increase of 7.73% in gasoline prices American enterprise institute May 26, 2009 Kevin A. Hassett American Enterprise Institute Aparna Mathur* American Enterprise Institute Gilbert E. Metcalf Department of Economics Tufts University and National Bureau of Economic Research “The Consumer Burden of a Carbon Tax on Gasoline” http://www.aei.org/docLib/Consumer %20Burden%20AEI%20WP%20147.pdf [CR] “For purposes of our analysis, we consider the effect of a carbon tax set at a rate of $15 per metric ton of carbon dioxide assuming it were in effect in three different years: 1987, 1997, and 2003.12 This allows us to see how changing consumption patterns over time influence the distribution of the tax. Because we are considering a carbon tax in different years, we deflate the tax rate to keep it constant in year 2005 dollars. Using the CPI deflator, the tax rates we consider are $8.73 in 1987, $12.33 in 1997, and $14.13 in 2003. The incidence calculations require two types of data. First, to assess the impact of the carbon tax on industry prices and subsequently on prices of consumer goods, we use the Input-Output matrices provided by the U.S. Bureau of Economic Analysis. Second, once we have the predicted price increases for the consumer goods, we need to assess incidence at the household level. For this, we used data from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey for various years. Note that the carbon tax is essentially applied to coal, petroleum and natural gas, and we obtain price increases for all consumer goods. These price increases were the focus of our previous paper, Hassett, Mathur and Metcalf (2009) and are reported here in Appendix Table 1. In this paper, we focus on the gasoline price increase as a result of the tax and estimate the tax burden on households. As the table shows, the estimated gasoline price increase is approximately 9.67% in 1987, 7.64% in 1997 and 7.73% in 2003. In this section, we discuss how we combined the two different datasets to calculate the incidence at the household level.”

B. Carbon tax link American enterprise institute May 26, 2009 Kevin A. Hassett American Enterprise Institute Aparna Mathur* American Enterprise Institute Gilbert E. Metcalf Department of Economics Tufts University and National Bureau of Economic Research “The Consumer Burden of a Carbon Tax on Gasoline” http://www.aei.org/docLib/Consumer %20Burden%20AEI%20WP%20147.pdf [CR] “A consequence of a carbon tax (or a cap and trade program to cut emissions) is the subsequent rise in energy prices (as well as prices of energy intensive goods and services) which would be passed on from the firm to the consumers in the form of higher prices of gasoline and other commodities. Therefore a major concern with any such program is that the burden of the costs arising from such a policy will fall disproportionately on low income households. In other words, the policy will be regressive. For instance, a recent CBO paper (2007) estimates that the price increases resulting from a 15 percent cut in CO2 emissions through a cap and trade program would cost the average household approximately $1600 (in 2006 dollars) and about 3.3 percent of income for households in the bottom quintile of the population.5 In Hassett, Mathur and Metcalf (2009), we estimate that the cost of a carbon tax on the lowest decile of the population would be about 3.74 percent of income, over four times the cost on the highest income decile.”

C. Carbon tax raises prices in British Columbia CBCnews April 29, 2008 “B.C. gas prices to rise 2.4 cents with carbon tax” http://www.cbc.ca/canada/british-columbia/story/2008/04/29/bc-gas-pricescarbon-tax.html [CR] “The high price of gasoline is about to get higher in B.C.(British Columbia) once the provincial government's carbon tax is fully implemented. Starting July 1, the price of gas will increase 2.4 cents a litre, and by 2012 it will be 7.25 cents more. And heating your home will also cost more with an extra 2.8 cents tax on both natural gas and furnace oil.”

Impacts: 1. Econ generic A. Oil prices cause all major recessions and current recession James D. Hamilton Professor of Economics May 20, 2009 University of California, San Diego Testimony Prepared for the Joint Economic Committee of the U.S. Congress “Oil Prices and the Economic Downturn” http://www.house.gov/jec/news/2009/Hamilton_testimony.pdf [CR] “Big increases in the price of oil that were associated with events such as the 1973- 74 embargo by the Organization of Arab Petroleum Exporting Countries, the Iranian Revolution in 1978, the Iran-Iraq War in 1980, and the First Persian Gulf War in 1990 were each followed by global economic recessions. The price of oil doubled between June 2007 and June 2008, a bigger price increase than in any of those four earlier episodes. In my mind, there is no question that this latest surge in oil prices was an important factor that contributed to the economic recession that began in the U.S. in 2007:Q4.”

B. Oil shocks should get credit for the recession Jeff Rubin and Peter Buchanan October 31, 2008 CIBC World Markets Inc. CIBC has been named "Investment Bank of the Year - North America" StrategEcon http://www.manicore.com/fichiers/Rubin_Buchanan_CIBC.pdf [CR] “Certainly oil shocks are no stranger to recessions. Four of the last five global recessions were preceded by one (Chart 1). Yet the recent spike in oil prices doesn’t seem to get any credit for what’s happening to the world economy now. That’s odd because it should. Curiously, an over-500% increase in the real price of oil gets virtually ignored as a culprit behind today’s economy, eclipsed by the ongoing crisis in financial markets. Yet the runup in real oil prices this cycle is over twice the spike in oil prices that occurred during the first or second OPEC oil shock (Chart 2). And those oil shocks produced two of the deepest recessions in the entire post-war period, including the 1980-82 double dip.”

C. Oil prices cause stagflation Nouriel Roubini Stern School of Business, NYU and Brad Setser Research Associate, Global Economic Governance Programme, University College, Oxford August 2004 “ The effects of the recent oil price shock on the U.S. and global economy” http://pages.stern.nyu.edu/~nroubini/papers/OilShockRoubiniSetser.pdf [CR] “Oil prices shocks have a stagflationary effect on the macroeconomy of an oil importing country: they slow down the rate of growth (and may even reduce the level of output – i.e. cause a recession) and they lead to an increase in the price level and potentially an increase in the inflation rate. An oil price hike acts like a tax on consumption and, for a net oil importer like the United States, the benefits of the tax go to major oil producers rather than the U.S. government.”

2. Econ: Mortgage crisis A. Oil caused mortgage crisis: homes farthest from urban core were the first to go, shows a correlation between commuting costs and repayment James D. Hamilton Professor of Economics May 20, 2009 University of California, San Diego Testimony Prepared for the Joint Economic Committee of the U.S. Congress “Oil Prices and the Economic Downturn” http://www.house.gov/jec/news/2009/Hamilton_testimony.pdf [CR] “There is also an interactive effect between the oil price shock and the problems in housing. Lost jobs and income were an important factor contributing to declines in home sales and prices, and we saw the biggest initial declines in house prices and increase in delinquencies in areas farthest from the urban core, suggesting an interaction between housing demand and commuting costs. Once house price declines and concomitant delinquencies reached a sufficient level, the solvency of key financial institutions came to be doubted. The resulting financial problems turned the mild recession we had been experiencing up until 2007:Q3 into a much more severe downturn in 2008:Q4 and 2009:Q1. Whether those financial problems were sufficiently insurmountable that we would have eventually arrived at the same crisis point even without the extra burden of the recession of 2007:Q4-2008:Q3 is a matter of conjecture. But that oil prices made an important contribution both to the initial downturn as well to the magnitude of the problems we’re currently facing seems to me to be indisputable.”

B. Recession not caused by mortgage crisis: the timing is closer to an oil shock not mortgage crisis Jeff Rubin and Peter Buchanan October 31, 2008 CIBC World Markets Inc. CIBC has been named "Investment Bank of the Year - North America" StrategEcon http://www.manicore.com/fichiers/Rubin_Buchanan_CIBC.pdf [CR] “Not only is scale a problem with the subprime mortgage explanation for a global recession, but the rise in oil prices also provides a better fit with the timing of the downturn. If the credit crunch was to blame, one would have expected the European and Japanese economies to have slipped into recession after the financial crisis sent LIBOR(London InterBank Offered Rate, its and international credit interest rate) rates soaring. Instead, both economies tanked well ahead of the worst news for credit spreads. (Chart 5).”

3. Econ: auto-makers A. Higher oil prices hurt the auto sector; lost .5% of GDP because of losses in oil sector because of oil James D. Hamilton Professor of Economics May 20, 2009 University of California, San Diego Testimony Prepared for the Joint Economic Committee of the U.S. Congress “Oil Prices and the Economic Downturn” http://www.house.gov/jec/news/2009/Hamilton_testimony.pdf [CR] By June of 2008, the price of gasoline had reached $4/gallon, driving the energy budget share back up to 7%. While some people had been ignoring $3 gasoline, $4 definitely got their attention. The resulting abrupt changes in spending patterns can be quite disruptive for certain key economic sectors and seem to be part of the mechanism by which the earlier oil price shocks had contributed to previous economic recessions. The kinds of economic responses we saw between 2007:Q4 and 2008:Q3 were in fact quite similar to those observed to have followed previous dramatic oil price increases. One notable example was the plunge in auto sales. The number of light trucks sold (which includes the once-dominant SUV category) fell by 23% between 2007:Q2 and 2008:Q2. One indication that this sales decline was caused by oil prices and not other economic developments is the observation that sales of imported cars were up by 9% over this same period. Since the domestic manufacturers were more heavily reliant on sales of the less fuel-efficient vehicles, these changes represented a significant hit to the domestic auto sector. Declining production of motor vehicles and parts alone subtracted half a percent from total U.S. real GDP between 2007:Q3 and 2008:Q3. In the absence of those declines, real GDP would have clearly grown over this period and it is unlikely that we would have characterized 2007:Q4 - 2008:Q3 as a true economic recession. One hundred and twenty-five thousand jobs were lost in U.S. auto manufacturing between July 2007 and August 2008. If not for those losses, year-over year total job gains for the U.S.

economy would have been positive through the first year of what we now characterize as an economic recession.”

B. High gasoline prices hurts SUV demand, specifically hurting big three Government Accountability Office December 5, 2008 Statement of Gene L. Dodaro Acting Comptroller(Meaning head of GAO) General of the United States Testimony Before the Committee on Financial Services, House of Representatives http://www.gao.gov/new.items/d09247t.pdf [CR] “We appreciate the opportunity to testify on possible federal assistance to the domestic auto industry. The current economic downturn has added to the significant financial stress facing that industry. Deteriorating financial, real estate, and labor markets have reduced consumer confidence and available credit, and automobile purchases have declined. After reaching a recent high of about 1.8 million in July 2005, the number of vehicles sold in the United States dropped to about 800,000 in October 2008, approximately a 54 percent decline. While most auto manufacturers have experienced declining sales in 2008, recent economic conditions have particularly hurt sales of the “Big 3” domestic auto manufacturers (General Motors, Ford, and Chrysler), in part because these companies have historically derived most of their sales from vehicles such as sport utility vehicles, which are less fuel efficient, but more profitable than small cars. Higher gasoline prices over the past several years, which rose to over $4 per gallon in the summer of 2008 before falling steeply this fall, have contributed to a sharp decline in consumer demand for these vehicles. The tightening of the credit markets has also affected the Big 3 and their suppliers, which together employ about 730,000 people. In addition to potential job losses at auto manufacturers, the collapse or partial collapse of the domestic auto industry would adversely affect auto dealers, suppliers, and other sectors.”

4. Econ: Inflation A. Oil prices empirically cause inflation Michael LeBlanc Economic Research Service U.S. Department of Agriculture And Menzie D. Chinn LaFollette School of Public Affairs, University of Wisconsin Dept. of Economics, University of California, Santa Cruz February 19, 2004 University of California Santa Cruz Economics Working http://papers.ssrn.com/sol3/papers.cfm? abstract_id=509262 [CR] “Movements in oil prices have complicated the tasks of policymakers and business leaders over the past three decades. Increases in inflation during the 1970’s have been blamed, in part, upon rapid increases in petroleum prices. The long decline in inflation during the 1980’s and 1990’s have in turn been associated with declines in oil prices. Hence, a clear understanding of the strength of the empirical linkage between oil price changes and inflation is key to the proper conduct of monetary policy. To the extent that firms must alter their pricing policies according to the inflationary environment, firm managers also need to perceive the links accurately.”

B. Oil prices have empirically increased inflation Michael LeBlanc Economic Research Service U.S. Department of Agriculture And Menzie D. Chinn LaFollette School of Public Affairs, University of Wisconsin Dept. of Economics, University of California, Santa Cruz February 19, 2004 University of California Santa Cruz Economics Working http://papers.ssrn.com/sol3/papers.cfm? abstract_id=509262 [CR] “While most of the examples that come to mind are historical in nature, it would be a mistake to conclude that the impact of oil prices on the macroeconomy is now unimportant. For instance, we are more familiar with, in September 2000, crude oil prices in the United States reached $37 per barrel, more than tripling from levels in December 1998. Similarly, average world oil prices increased from $9 per barrel to $33 per barrel. And while the oil market responded with additional production, oil prices remained high and volatile until the spring of 2001. As oil prices increased, so did concerns about increasing inflation both in the U.S. and abroad. Beginning in June 1999 through May 2000, the Federal Open Market Committee of the Federal Reserve Board, partly in response to increasing oil prices, increased the federal funds rate on six different occasions. In other countries, rising oil prices complicated central bankers' efforts to check inflation and moderate changes in exchange rates, a particular concern in Europe.”

5. Econ: Consumer spending A. Oil price increases hurt consumer spending James D. Hamilton Professor of Economics May 20, 2009 University of California, San Diego Testimony Prepared for the Joint Economic Committee of the U.S. Congress “Oil Prices and the Economic Downturn” http://www.house.gov/jec/news/2009/Hamilton_testimony.pdf [CR] “More broadly, another pattern we observed in earlier oil price shocks was a deterioration in consumer sentiment and slowdown in overall consumer spending. Americans buy about 140 billion gallons of gasoline each year, meaning that a dollar per gallon increase in the price takes away $140 billion from their annual purchasing power. The declines in consumer sentiment and slowdown in consumer spending that we observed between 2007:Q4 and 2008:Q3 are very much in line with what we saw happen in response to historical energy price shocks of similar magnitude.”

6. Econ: Transfer money to high savings econ A. Petrodollar transfers end up in high savings economies meaning that less money gets spent Jeff Rubin and Peter Buchanan October 31, 2008 CIBC World Markets Inc. CIBC has been named "Investment Bank of the Year - North America" StrategEcon http://www.manicore.com/fichiers/Rubin_Buchanan_CIBC.pdf [CR] “In the past, oil shocks have triggered global recessions by transferring billions (or now trillions) of dollars of income from OECD economies with typically very low savings\ rates to OPEC economies with typically very high savings rates (Chart 3). For example, the transfer of income from US consumers to Saudi producers involves moving money from basically a zero-savings-rate economy to one in which the savings rate is around 50%. While many of those petro-dollars get recycled back into the financial assets of OECD countries, many of them never get spent. In effect, the income transfer from American motorists to Saudi Aramco means that more and more of the world’s income gets saved and less and less spent. That demand leakage shows up in a weaker world economy. Hence, the redistribution of global income from oil-consuming countries to oil-producing countries is far from demand neutral insofar as the global economy is concerned.”

7. Econ: Tourism A. Oil prices hurt 4/5 of the economy including travel(tourism) and agriculture Jeff Rubin and Peter Buchanan October 31, 2008 CIBC World Markets Inc. CIBC has been named "Investment Bank of the Year - North America" StrategEcon http://www.manicore.com/fichiers/Rubin_Buchanan_CIBC.pdf [CR] “And the risk is that the damage there is far from done (Chart 7). The past year’s high pump prices have not only decimated sales but sparked a discernable, potentially lasting reduction in miles driven. Nor is the damage from high oil prices limited to automobiles. Four-fifths of GDP shows a strong negative relationship to high energy costs. That includes the negative effect on a wide range of industries, including travel and agriculture, which increasingly just turns petroleum into food.”