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Andreoli onHear Derik Andreoli’s keynote address “How Energy Trends Will Impact OurSupply Chain Future” on Wednesday, <strong>October</strong> 26, as part of <strong>Logistics</strong> <strong>Management</strong>’svirtual conference Supply Chain Best Practices: Boost Productivity And Cut Costs.Register today: supplychainvirtualevents.comOil prices and the economy:predator and preyThere is an enticing line of argument employed bysome economists and analysts that is loosely based onthe predator-prey model, one of the earliest models inmathematical ecology.From an ecological perspective, the populations ofpredators and prey affect one another. For instance, asa population of lynx expands, the population of haresupon which they feast contracts. But as the populationof hares recedes, the carrying capacity for lynx isreduced, and the population of lynx falls into decline.Of course as the population of their primary predatordeclines, the number of hares rapidly expands, and soon. Visually, we might imagine a graph of the two populationsas two sine waves, one lagging the other.Similarly, many believe that high or rapidly rising oilprices cause recessions; but in turn, during a recession,industrial production and demand for transportationdecline. Consequently, the pricefor oil and fuel falls, and as it declines, theeconomy is stimulated.This makes sense because, to a largedegree, dollars not poured into our gas tanksare used to make other purchases or investmentsthat have a greater stimulatory effecton the economy. In this adapted model, risingoil prices are the lynx that menace thehelpless economy.The fact that oil price spikes preceded all but oneof the seven post-1970 U.S. recessions certainly lendsprima facie support for the predator-prey model, butcorrelation does not prove causation and the economyis clearly affected by more than just the price of oil.According to the research of a pair of universityeconomists and a member of the Federal ReserveBoard, however, the rate of unemployment can beaccurately predicted using just two inputs: oil pricesand real interest rates. To be clear, their model passesthe Granger causality test, hence the researchers canstate beyond a statistical shadow of doubt that an oilprice or interest rate movement in period one causesa movement in the unemployment rate in period two.This discussion of the predator-prey model begsimportant questions, not the least of which include:“Are we headed back into recession?” “And, with theeconomy sputtering, why are oil and fuel prices so high?”Derik Andreoli, Ph.D.c. is the Senior Analyst at MercatorInternational, LLC. He welcomes any comments or questions,and can be contacted at dandreoli@mercatorintl.com.Regarding the former, evidence is certainly mountingthat the U.S. is on the cusp of a double dip, if notalready sliding into recession. The unemployment rateremains over 9 percent, with 14.8 million unemployedand another 11.6 million discouraged or underemployed.The four-week average for unemploymentbenefit requests was up for the fourth straight week (asof September 15), and the poverty rate has ascended toa level not reached in more than 50 years.On the housing front, foreclosures jumped 33 percentbetween July and August—the biggest single—month jump in four years. Given the state of the job andhousing markets, it should come as no surprise that inAugust consumer confidence dropped a staggering 14.7points and CEO confidence retreated 12 points.Then there is my favorite leading indicator, theWe know there’s a turn up ahead, but it’s stilldifficult to see whether the road is going totake us to recovery and even higher fuel prices,or stagnation with high fuel prices.Ceridian-UCLA Pulse of Commerce Index (PCI),which is a measure of fuel consumed by truckers purchasingdiesel from cardlock facilities. The seasonallyand workday adjusted PCI fell 1.4 points in August afterdeclining 0.2 points in July, indicating that fewer goodswere in transit for two consecutive months. Needless tosay, this decline does not inspire warm and fuzzy feelingsabout U.S. economic prospects.That’s a lot of bad news, but to prove that I’mnot a pessimist, I’ll share the Ceridian interpretation,which urges caution to those who might interpret thedecline in the PCI as a harbinger of recession. In theSeptember report, the Ceridian folks said that “weexperienced similarly sluggish PCI and GDP growth inthe aftermath of the 2001 recession. During that time,the economy didn’t really get moving until a wave ofnew home ownership rose. Best therefore to considera slow-growth alternative to a recession—stumblingforward, waiting to get the energy to run again, but notfalling down.”I find this quote particularly compelling becauseit points out that the economy did not recover fromthe last oil-price-spike-led recession until the housing22 <strong>Logistics</strong> <strong>Management</strong> WWW.LOGISTICSMGMT.COM | <strong>October</strong> <strong>2011</strong>