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Rising Oil Prices. What is the effect on IT?

IT Budgets will be further cut. Prices have now reached 40$ a barrel. If it gets worse (looks like it will), the effects could make the 2001 downturn look like a  picnic. Massive layoffs could follow and we could enter into a depression, not just a recession.

Any hope in sight?. Not unless the US or the Germans come up with some innovation workable for the huge motor industry AND Americans bring back their soldiers from the middle east AND Iraq becomes stable.  Thats too many AND operators. Hopefully, the place will become more peaceful- which is the only way out, even if temporary.

Krugman wrote that no major oil discoveries were made from 1976 onwards. He also believes that the current prices may not be temporary like the last gulf war.

I suspect millions of people in third world countries have already been pushed below the poverty line. We are all next in line.

Karthik
Friday, May 07, 2004

I think you're 180 degrees wrong.

IT budgets will increase, and there will be increased pressure on IT departments to produce greater efficiencies in operations.

I work for a plastics manufacturer.  Plastic is made from oil, so in addition to freight costs, our raw materials costs are going up drastically.  It's reshaping our entire market as competitors who didn't protect their prices as well as we did are going bankrupt.

The obvious corporate solution is to squeeze all the efficiency you can out of existing systems or implement new ones to offset rising costs elsewhere.  That's what's happening at my employer, and what I'm hearing at other companies.

The director of purchasing here just made an interesting observation to me: Chinese demand is what's driving the oil prices now, since their industrial and automative segments are taking off.

Justin Johnson
Friday, May 07, 2004

Justin,
I hope i am 360 degrees wrong and you are right !

Karthik
Friday, May 07, 2004

".....I hope i am 360 degrees wrong...."

360 degrees doesn't change your course a lot ...

Liam
Friday, May 07, 2004

Would 720 be twice as wrong?  Or twice as right?

gad
Friday, May 07, 2004

Karthik I highly recommend that you pick up a copy of "Naked Economics". Very insightful book that might ease your worry that everything is going to lead to a global depression. One door closing is another door opening, and if we see consistently high oil prices there'll be a lot of exciting activity and investment in the energy and transportation markets.

"Not unless the US or the Germans come up with some innovation workable for the huge motor industry"

I couldn't let this one slide by - We live in a society where the hottest selling vehicles are massive gas guzzling SUVs, most drivers commute alone (I'm not throwing stones - I commute 76 km every day), and alternative technology gets little investment or consumer support. If oil prices rose enough to change our habits, we'd change our habits and life would go on, but as it is it's hardly like we're a study of conservation.

Regarding large oil finds, there are tremendous oil resources that weren't pursued when the price of oil could only support "stick a straw in the ground and suck it out". The Alberta oil sands are a case in point, but now that the price of oil is high enough to support processing there is a lot of activity taking place.

"I suspect millions of people in third world countries have already been pushed below the poverty line. "

THE SKY IS FALLING!!!  In the past two decades the global poverty rate has dropped from around 40%, to 10%.

Dennis Forbes
Friday, May 07, 2004

I can only speak on a very microeconomic level, but rising gas prices have caused me and my two-man software company to look at our budgets, realizing that quite a bit of money goes to gas, and that amount is increasing.  I've even thought about raising prices to compensate, but I don't think that will happen.

The other effect is that I went into a bike shop yesterday, and I will probably go back next week and come out with a brand new Trek.

JT
Friday, May 07, 2004

Karthik,

I can't speak to Rising Oil Prices having an effect on IT as I'm not an economist, however, I think you've been in a bit of a panic recently.  All of your posts are jumping at the worst possible conclusions.

- Microsoft will break Mono on purpose
- Rising Oil is going to cost you your job
- Longhorn Requirements are going to put MS out of business

Just relax man, and take a breath.  All of these things could happen tomorrow, and amazingly life would still go on for you and everyone else in the world.

Elephant
Friday, May 07, 2004

Rising oil prices could even lead to more telecommuting, which would make this IT worker pretty happy.

Chris Tavares
Friday, May 07, 2004

Time for Americans (which I am) to pay the piper for these crazy SUVs and 50 mile round trip commutes.  Yea that means you.  Here in Tahoe gas prices are at $2.50/gallon.  That honestsy doesn't effect me much since I drive a Subaru and commute two miles a day, but all those Bay Area folks in their Ford Excursions.  Well that could be another story.  The polution is getting so bad in the Central Valley anything rise in gas prices has to help that.  Before long we won't be able to freaking breath in California.

Also think of this.  What makes more sense the dreamliner or the Airbus A380?  I have a feeling Boeing could be selling a lot of aircraft in the next couple years.  Also as shippings costs rise, manufacturing close to home makes more sense again.

christopher baus (www.baus.net)
Friday, May 07, 2004

Elephant hints at an important point.  There is a sort of person in the world (call them pessimists for the sake of arguement) who always seem certain that unendurable catastrophe is around the corner.  Sure their reasons for the catastrophe keep changing but, by golly, we're doomed.

Ultimately, if by chance, things go wrong and they get to say "see I told you so".

Think back twenty years at all the doomsday scenarios people figured we'd be reaping by 2004.  Still, in the broad expanse of history life is pretty good...for me anyway.

name withheld out of cowardice
Friday, May 07, 2004

First of all, the price of gas is not significantly worse today when adjusted for inflation. See the graph at this site.
<http://www.ghg.net/stuart/gasprice/gasprice.html>

> US or the Germans
> some innovation workable for the huge motor industry

Second, I don't understand this at all. Why only the US and Germany? Is there no other country capable of innovation? And the huge motor indsutry is something I know very well. There are innovations happening every day, however the efficiency of large motors won't be improved by anything greater than a fraction of a percent by any of them. The industry is already getting about as much as is possible from them according to the laws of thermodynamics. Perhaps you would like us to repeal one of them?

> Americans bring back their soldiers from the middle east

This is not likely to happen within my lifetime. Our soldiers are still in Japan and Germany from a time prior to even I was born and in Korea from when I was rather young. Realistically, one can expect, based on past history, that they'll be based in or near Iraq for a long long time.

None of the above has or will have a major impact on the IT industry. The connections are second or third order. IT is an infrastructure element that is necessary for war or peace, for efficient or inefficient industries, and IT is far more independent of the price of oil than almost any other industry I can think of.

In fact the US economy is in the midst of a major rebound in spite of what some politicians would like you to believe, so corporate investment in IT is increasing.

old_timer
Friday, May 07, 2004

1.  Don't read Krugman, or at least read him with some
skepticism.  There was a time when he was a fair economist,
but he's basically a leftie rabble-rouser nowadays.
No matter what's happening, he knows that there's an
election coming up and his column will be heavily influenced
by the need to present doom-and-gloom to get rid of
Dubya.

2.  Remember that communication and transportation
tend to be competing, not complementing, economic goods.
Things that make transportation more expensive will
_increase_ the need for efficient communication and
information management, not decrease it.

x
Friday, May 07, 2004

" realizing that quite a bit of money goes to gas, and that amount is increasing.  I've even thought about raising prices to compensate, but I don't think that will happen.
"

Really?

This makes no sense. Gas is a tiny (10% to 20%) fraction of the cost of running your car. Gas is about $.06/mile and your car costs more like $.30/mile.

AND, the cost of your car is a TINY fraction of the cost of your hourly rate. I.e., travelling 60 mph and having time worth about $60/hr means that YOUR TIME is about $1 per mile.

Your time is worth WAY more than the cost of gas.

So... you may want to rethink how much driving you have to do, but not because of the cost of gas.

Mr. Analogy
Friday, May 07, 2004

According to most media news outlets oil price/barrel has reached the same price as it was 1990 $40 USD

BUT

Something in 2004 that costs $40USD would cost $32USD in 1990
Similarly $40 USD (1990) is now equivalent to $50 USD (2004)(measured using the wholesale inflation index)....

There is a way (another 25%) to go before we hit 1990 prices...

Then theres always the 80's  where the avg/gal of gas costs about $1.30USD ($3.20 USD 2004)

Yes, the price could go higher, but you need to put things in perspective...


Some people dismiss the fact that when you adjust for inflation it isn't as bad as it looks, but then there would be no news to report about it :)


disclaimer:  i used http://www.halfhill.com/inflation.html to caclulate the adjustment.

apw
Friday, May 07, 2004

The Saudi stock market reached an all-time high yesterday, so somebody doesn't think oil prices are going to collapse any time soon.

Ironically this happened after the US ambassador's comments to his citizens at Yanbu "What are you all still doing here?". I presume the two are unrelated though :)

There is plenty of oil that was not being extracted because the price was above the market value, but the real problem is that we are likely to reach the position some time soon (like 2010) when the amount of oil left is less than that which has already been used up, and prices are going to continue to rise inexorably after that date.

The Chinese demand could easily be met by increased Iraqui production, but I don't see that happening soon.

The Americans aren't going to be leaving this year, but the comparison with American bases in Japan, Germany, Korea or the UK miss the point. In none fo those countries were the Americans involved in major warfare against the majority of the inhabitants one year after the war had ended, with everybody reckoning the tension can only get worse.

Stephen Jones
Friday, May 07, 2004

The American stock market hit an all time high in 2000.  Apparently someone thought tech stocks were going higher.

christopher baus (www.baus.net)
Friday, May 07, 2004

"In none of those countries were the Americans involved in major warfare against the majority of the inhabitants".

"Majority" means 50%+ of the population. In Iraq the total number is closer to half a percent, and plenty of that number are foreign fighters, not permanent members of the population.

"Major warfare" means something akin to fighting in the trenches, air raids every night, missiles and artillery being fired constantly... in other words, nothing like the absurd "truce" scenario being played out in Najaf or Fallujah.

An unrelated point: Chinese commodity demand will not last forever. There is every indication that the boom is set to bust. Whether that's now or in five or ten years, the end result will be less demand for oil. OPEC may still manage to keep prices up, but it will be much harder.


Friday, May 07, 2004

"Ironically this happened after the US ambassador's comments to his citizens at Yanbu "What are you all still doing here?". I presume the two are unrelated though :)"

Oh just ignore Stephen and his seething hatred towards Americans. He is predictable at least. 90% of his post will have some attack, criticism or jab at American, Americans or anything that America is involved in.

Who me?
Saturday, May 08, 2004

Dear Blank,
                  Nice to know that somebody believes White House propaganda.. What has been happening in Iraq is  "something akin to fighting in the trenches, air raids every night, missiles and artillery being fired constantly... " and that was during the 'truce'. There are good reasons why the occupying forces made a policy decision not to release casualty figures for Iraqui combatants and civilians.

                  The opposition to the US was originally supposed to be ex-Baathists, then disgruntled Sunnis, and then the foreigner card came up. If foreigners are such a significant part of the oppostion to the Americans, how is it that most of the casualties are Iraquis?

                  It is true that only a small proportion of the Iraqui population is actively  engaged in resistance to the Americans, but active combatents are only a small part of the population in any war. Moreover, whilst it is doubtful that a majority of Iraquis actively support the insurrection a clear majority do want the Americans out, and the American poliicy of wholesale bombing of civilian targets is increasing support for the insurrectionists every day.

                    At present the only support the Amercians seem to have, apart from that of the small number of people who are profiting from the kickbakcs and corruption of the puppet government are the Kurds. If America continues to use them as the basis for the reconstituted Iraqui army (and most of the Arabs are either deserting or going over to the enemy) then they will have caused the very internecine strife they claimed they were there to prevent.

Stephen Jones
Saturday, May 08, 2004

The effect is that it's pissing me off.

Jorel on Software
Saturday, May 08, 2004

Anyone who disagrees with you must be "taken in by White House propoganda". Nice, Steve.

Anyway, apologies to those reading who thought this was a software forum. I thought it was worth correcting Steve's exaggerations - which they were, and which anyone with access to Google News can verify.

And now, Hitler. End of thread.


Saturday, May 08, 2004

Dear Blank,
                  A Gallup poll taken in Iraq before the release of the pictures and videos of prisoner abuse showed that 10% of the Iraquis interviewed supported the American presence. That leaves the other 90%, not the other half per cent.

                The American and British governments have been lying through their teeth since September 12th 2001. Most of the American media has been tagging along for 'patriotic' reasons. As you have access to the Google archive why not do a search for WMD or Uranium + Niger or Saddam Hussein + Al-Qaeeda.

                  I didn't bring the matter up to be anti-American. The American presence in Iraq is the second most important cause of instability in the region (the first is the USA's support for Israeli territorial expansion). This instability is one of the causes of high oil prices at present.

Stephen Jones
Sunday, May 09, 2004

Rising fuel prices won't do much to affect commuters in America.  People want their SUVs and their suburban homes 30 miles outside the city no matter what, even if they have to give up something else.

The real difference will be with large corporations whose fuel and transportation bills are in the millions per year.  Some might be put out of business, but it could actually have the effect of increasing jobs locally in IT and manufacturing.  If high freight costs cause the made-in-China goods to get too expensive, it might become cheaper to manufacture them locally.  If business travel becomes too expensive, there will be a greater demand for various IT solutions that facilitate remote collaboration.

T. Norman
Sunday, May 09, 2004

People might trade in their SUV's or even take to car pools if the price of fuel goes up high enough, but I can hardly see them selling their houses.

As for local manufacturing over imports I doubt it. The cost of transporting from the port to the retailer is where most of the transport costs go. It really costs very little to transport tons of thngs a few thousand miles in a container ship.

Stephen Jones
Sunday, May 09, 2004

Where I live fuel price is 5.8$US/gallon. Still does not seem to have a major impact on most peoples private car buying habits.

Just me (Sir to you)
Monday, May 10, 2004

ha

mr. me
Wednesday, September 01, 2004

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