Jan

10

 In my local paper the last two mornings is bad local economic news. The other day in my area R&J Trucking out of Boardman, Ohio laid off 36 drivers up the road from Belpre at their local hub. Then International Converter in Belpre shuts down and 45 jobs are lost and in this morning's paper Eramet near Marietta, Ohio lays off 110 workers out of 330. I note oil at $40 today and gas prices dropped a dime today in Belpre.

The news attributes oil decline to less usage. This makes sense with all the lost jobs to truck drivers and individuals who drove their autos to work. I wonder if a formula could be developed to correlate lost jobs nationwide to the decline in oil price?

Phil McDonnell replies:

A trucking company should be more profitable because of lower gas prices, not less. They should be able to lower prices, if necessary because of their own reduced cost and this should stimulate demand and allow them to hire more people.

The fundamental point is that any model of the economy that took into account oil prices would only work for a certain part of the business cycle. At some times the higher price of oil is a tax on the economy which slows it down, so oil prices and the economy move inversely. At other times a drop in oil price serves as a reflection of the fact that the demand is reduced because of reduced economic activity, so oil and the economy move down together. This latter reality is what we are facing today.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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