In the October 7th edition of The Economist – the issue about the lack of economic growth in the world today without one mention of the damaged environment or dwindling natural resources (more on that later) – we get an article buried deep in the magazine about the coming oil shock.
The article clearly describes the current state of oil in our economy, and it’s not good news. See, production can’t keep pace with demand. When that happens, prices rise. “According to Goldman Sachs, world demand in the first eight months of the year was 2.7m bpd higher than in the same period in 2009.” That is a LOT of increased demand. This has had the result of keeping prices high: in the midst of the deepest depression in 75 years, oil is still at around $80 a barrel. This price would have been unthinkable even five years ago, when the economy was in “better” condition.
It’s going to get worse.
“In 2011 the fundamentals of supply and demand are likely to exert more upward pressure on prices. Francisco Blanch of Bank of America Merrill Lynch reckons that global demand is set to expand by 1.4m bpd as growth in developing countries offsets a decline in demand from sluggish rich countries. As a result he expects prices to hit $100 next year and to average $85 a barrel over the course of 2011.”
The US economy can’t get restarted when oil is this expensive – has it over the last 18 months? Even if our economy did restart, oil is now linked with the stock market, rising when it does: “since March last year, says Adam Sieminski of Deutsche Bank, oil prices and the S&P 500 share index have been positively correlated.”
Thus we are in a newfound conundrum: we need to grow our economy, but oil prices will rise with our prosperity, eventually getting to a point that will crash our economy again. The gloomiest news is that we will probably get an oil shock even without economic growth in the US, thanks to dramatically increasing demand elsewhere. “Looking still further out, the booming economies of China, India and other developing countries are set to need much more fuel in years to come.”
The article concludes by describing Peak Oil exactly, even as it dares not mention its name:
“Non-OPEC supplies, which have grown in recent years, may start to decline in 2012. New wells will fail to plug the gap left as older fields dry up, despite the investment that 2008’s higher prices encouraged. OPEC is likely to respond by calling on its spare capacity—belonging mainly to its biggest member, Saudi Arabia. OPEC is tight-lipped about how much it has on tap. Some estimates put it at about 5m-6m bpd, though others think the amount that could readily hit the market is much lower.
Such calculations determine estimates of when demand will begin to outpace supply, a circumstance that, just as in 2008, is likely to cause precipitous price spikes. Jeffrey Currie of Goldman Sachs reckons that demand could be “bumping up” against capacity in 18 months. Other analysts with greater doubts about global growth and more optimism about OPEC’s capacity give it four years or more.”
“…precipitous price spikes…”
Sounds like an oil shock to me. But only if the world economy grows. If it doesn’t, if we stay in perma-recession, then the oil shock may be delayed a few years. This sure is a lousy choice: growth, and oil shock soon, or perma-recession, and oil shock a little later.
And here in lil’ ole’ Lex, everyone is just whistling along, waiting and hoping for the past to come back again.