Photo: thefiveten77/Flickr.
Four years ago, when I was still chief economist at CIBC World Markets, I forecast that global economic growth was on pace to send oil prices to $200 a barrel by 2012. In short, the argument was based on a supply-driven analysis that weighed the sources of future oil supply against the prices that would be needed to make the extraction and processing of that oil economically viable.
Since that call (which clearly hasn’t come to pass) received some attention at the time, it feels fitting to spend a few words discussing what happened to derail the projection. That particular analysis, unfortunately, didn’t adequately address the stifling impact that rising oil prices would have on economic growth. At the time, a constrained outlook for global production growth against a backdrop of runaway demand meant prices had nowhere to go but up. As subsequent events would dramatically demonstrate, though, triple-digit prices had a much more critical affect on demand than supply.
By the time oil reached $147 a barrel, the economic drag was more than sufficient to trigger a chain reaction of events — including spurring higher interest rates which pricked the US sub-prime mortgage bubble — that ushered in the deepest global recession of the post-war era. Instead of marching towards $200 a barrel, oil prices abruptly reversed course and plunged all the way to $40 a barrel.
The return of low prices was taken, by some, as proof that oil will continue to be as cheap and abundant as ever. As a quick return to the triple-digit range for oil prices indicates, however, that’s clearly not the case. My call for $200 oil was designed to underscore the massive cost of supplying the world with more than 90 million barrels a day. Then, as now, I stand by the analysis. Pumping out ever more barrels will require ever-higher prices. Just look at what happened when oil prices plunged. In Alberta’s tar patch alone some $50 billion in spending was either cancelled or postponed. The story was much the same offshore Brazil and in Venezuela’s heavy oil belt, a pair of locales that will play a vital role in meeting the world’s future oil needs.
If a mea culpa is in order, its roots can be found in the decision to underplay the demand side of the equation. Oil prices plunged to $40 a barrel after economic growth collapsed, taking global oil demand along for the ride. And that same movie is about to play out again. Recessions are already rolling across Europe. Economic growth in North America is lackluster, at best. Meanwhile, the specter of sovereign debt defaults in the euro zone continues to hang over global financial markets. Added up, it spells another sharp drop for oil prices not because fuel is abundant, but because once again the world can’t afford to stay out of a recession.
What happened to my forecast for $200 oil? Quite simply, the end of growth.
Re-posted from Jeff Rubin’s Smaller World.
– Jeff Rubin, Transition Voice
About Jeff Rubin
I wonder how much the banking schemes are affecting the value of the oil. We aren’t actually paying the costs to create the dollars that are being ‘printed’ by Benanke et al through government debts…..yet. This SHOULD cause the price of oil to go higher through inflation, but the banks are holding those extra dollars in the form of bonds (basically borrowing money at zero interest and loaning it back to the government). This allows the government to do things cheaply (on the backs of future taxpayers) such as keeping the sea lanes open and remaining engaged in “National Security” to maintain oil flows that would be shut off if we didn’t keep our arms up to our shoulders in the rectums of the world, pulling out the sludge and keeping our refineries filled with it.
Your 200 dollar oil is already here, and we are burning it: we just aren’t paying for it yet. In fact, I would guess that we are actually burning oil worth 10 times that price when you consider how many people are going to die when the juggler’s plates come down.
P.S. Please refrain from the terminology of “world’s future oil needs.” This does a disservice to correct language skills and reality. It should read “the world’s future oil desires.” To call a luxury a need is how we got into this mess (anthropocentric delusions) in the first place.
Follow up related: http://www.moneynews.com/StreetTalk/Faber-100chance-recession/2012/05/31/id/440837
Faber: ’100% Chance’ of Global Recession
But, more to the doomification point:
“Where Faber sees a global recession, Wiedemer sees much more widespread economic destruction.”
In a recent interview for his newest book Aftershock, Wiedemer says, “The data is clear, 50% unemployment, a 90% stock market drop, and 100% annual inflation . . . starting in 2012.”
George Monbiot (Guardian, 03/07/12) seems bent on carving a name out for himself as a professional controversialist, slaughtering what he claims to be ‘sacred cows’ allegedly dear to the green movement. In the past, he has used his Guardian column to demand a massive house building programme, regardless of its environmental cost. Next, he suddenly advocated his support for nuclear power. He used the Fukushima disaster to spotlight his ‘courageous’ change of mind. Now, in yet another volte face, he dismisses the notion of ‘Peak Oil’. Such stances doubtless draw attention to his writing but the words of this self-styled ‘green’ lack any real ecological wisdom.
For a start, ‘Peak Oil’ is not about the availability of oil and its by-products per se. The issue is the future supply of readily available, cheap and secure supplies of this absolutely critical resource. It is, of course, hard to be precise about such things. But serious discussion should set current and likely future production against more rapidly expanding consumption. Monbiot does not do that. Nor does he consider the even more important question of energy return on energy invested. The new discoveries he trumpets are not at all like the first oilfields tapped in places such as Texas and Saudi Arabia where oil simply spurted out of the ground. A lot of oil will have be burned simply to access, process and transport any new oil. Nor does he bother to consider other necessary inputs and their consequent depletion/degradation (water etc.). The toxic liquids and waste tailings that will to be dumped somewhere when oil shale and other unconventional sources are tapped: unconsidered.
Furthermore, his diatribe contains no mention of the biodiversity costs nor of the negative impact on local people. He seems unaware of the ‘Jeavons Paradox’. Any increased supply will, most likely, fuel greater demand which, in turn, will cancel out the supposed benefits of new sources as well as greater efficiencies in their use. Given that he treats the threat from population growth, and the demands that it generates all by itself, as but another set of sacred cows, this dimension is simply left out of the account too.
And he omits to mention the most important fact of all: oil is only one of dozens of non-renewable resources. All are vital to the operation of an industrial economy. All have or are set to peak in the next couple of decades in terms of high quality, concentrated and reliable supply. In the past, substitution and increased efficiency have provided ways around individual resource barriers. Today, we face a whole new ball game. Its effects will dwarf those of current government ‘austerity’ programmes.
And that is before we take into account the inevitable side-effects, the environmental degradation and pollution, that accompany resource extraction, processing, manufacture and disposal. Perhaps his next column will announce that, single-handedly, he has repealed the laws of thermodynamics as well.
To be fair, Monbiot does refer to global overwarming and the dire threat it poses. But, taken as a whole, his thinking is essentially one-dimensional, not counting all the dots nor joining them. If the Earth depends friends like this…
Sandy Irvine, Newcastle Green Party