Oil as an economic thermostat

Okay, this and one more post about politics, then I promise to get back to science and engineering.

Back in October 2008, when the price of oil was falling faster than a bowling ball thrown from an airplane, various oil producing nations barked what their ideal price of a barrel of oil was, i.e. their "sustainable price." Venezuela and Iran led the charge with estimates around $100/barrel. The low-ball number came from Saudi Arabia, whose Oil Minister claimed $45-55/barrel was the lowest profitable number.

Basic economics states that all things being equal, consumers will buy the cheapest available product, and so the guy who is selling cheapest sets the market price for the product. So it makes sense that after the initial mega-dip to ~$30 oil, it has stabilized and now is oscillating between $45 and $55/barrel.

Although the ideal case would be that the U.S. economy would start growing, and grow as fast as possible, if I have learned anything in the last year is that unabated, explosive growth is usually fake, or at least unsustainable. Slow, steady growth, like a Burr oak tree, seems to be the best way to produce the longest, strongest economic growth period possible.

What I am suggesting is that we use the price of oil as a thermostat for U.S. economic growth. If the price of oil escapes two standard deviations above $55, then we need to increase interest rates and take other actions to slow U.S. economic growth. If the price of oil drops two standard deviations below $45, then we need to decrease the nominal interest rate and provide economic incentives to push the economy forward. This price, $55, could gradually increase at the rate of dollar inflation, in order to keep things on track.


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