The Economist: 'Feeling peaky?'
mobbsey at gn.apc.org
Fri Apr 20 16:31:31 BST 2012
-----BEGIN PGP SIGNED MESSAGE-----
Feeling peaky: The economic impact of high oil prices
The Economist, April 21st 2012
AS THE developed-world economy tries to gain momentum, it faces a
persistent headwind. The oil price remains stubbornly over $100 a barrel,
acting like a tax on Western consumers. Some blame the high price on evil
speculators—Barack Obama unveiled plans to increase penalties for market
manipulation on April 17th. But there is a simpler explanation: that supply
is inadequate to keep up with rising demand.
The concept of peak oil—the idea that global crude production may be at, or
close to, its limit—is far from universally accepted. One leading asset
manager talked recently of the world being “awash with energy” because of
the exploitation of American shale gas. Nevertheless, oil is still the main
fuel for cars and trucks. And crude output (as opposed to alternatives such
as biofuels and liquids made from gas) has been flat since 2005.
A number of countries (including Britain, Egypt and Indonesia) have turned
from net oil exporters into importers in recent years. And although rich
countries have curbed their energy-guzzling a little, demand continues to
surge in emerging markets.
This has left the oil market very vulnerable to temporary supply
disruptions, such as the war in Libya. Speaking at a conference in Dublin
this week, organised by the Institute of International and European Affairs
and the Association for the Study of Peak Oil and Gas, Chris Skrebowski, a
consulting editor of Petroleum Review, argued that spare capacity in the
oil market could be eroded by 2015.
The peak-oil concept was devised by the late M. King Hubbert, who correctly
predicted in 1956 that oil output in the lower 48 states of America would
peak by around 1970. At the conference Michael Kumhof, an economist at the
International Monetary Fund, presented the findings of a forthcoming working
paper which showed that adding the idea of a “Hubbert peak” to energy
production greatly improved the ability of a model to forecast oil prices.
Based on an expected 0.9% annual increase in production over the next
decade, the model predicts that real oil prices will nearly double over the
The economic damage caused by such a rise is predicted to be modest,
perhaps 0.2% of global GDP a year. In the past changes in oil prices have
had a limited long-term impact, since any losses to oil importers are
matched by gains by oil exporters. To the extent that high oil prices
played a role in the recessions of the early 1980s and 2008-09, the main
reason is that oil-producing countries tend to have a lower marginal
propensity to consume their income, denting global demand.
Nevertheless, Mr Kumhof worries that if oil prices are high enough, the
economic impact might increase substantially. On the most extreme
assumptions, it could be 2% a year.
Even if the world can find more oil—in the Arctic or tar sands, say—the
longer-term question is whether the era of “cheap energy” is over and how
the world can adjust if it is. Developed economies are built on easy access
to cheap energy, importing goods that are transported from around the
world, with consumers driving many miles to work in air-conditioned offices
and then flying off to sunny climes for their annual holidays. Persistently
high oil prices would clearly lead to substitution (electric cars, natural-
gas-powered trucks) but the transition costs could be significant.
Furthermore some potential substitutes for, or new sources of, oil (such as
biofuels and tar sands) are a lot less efficient, in the sense that they
require significant amounts of energy simply to produce. To the extent that
this equation (energy return on energy invested, or EROI) is deteriorating,
that must surely have an effect on economic growth.
“What is the minimum EROI that a modern industrial society must have for
its energy system for that society to survive?” ask Carey King and Charles
Hall in a recent paper*. The academics’ answer: “Complex societies need a
high EROI built on a large primary energy base.”
This issue is not much considered by mainstream economists, who are too
busy focusing on monetary policy, the impact of fiscal austerity or the need
for labour-market reforms. But just as the industrial revolution was built
on coal, the post-second-world-war economy was built on cheap oil. There
will surely be a significant impact if it has gone for good.
"We are not for names, nor men, nor titles of Government,
nor are we for this party nor against the other but we are
for justice and mercy and truth and peace and true freedom,
that these may be exalted in our nation, and that goodness,
righteousness, meekness, temperance, peace and unity with
God, and with one another, that these things may abound."
(Edward Burrough, 1659 - from 'Quaker Faith and Practice')
Paul's book, "Energy Beyond Oil", is out now!
For details see http://www.fraw.org.uk/mei/ebo/
Read my 'essay' weblog, "Ecolonomics", at:
Paul Mobbs, Mobbs' Environmental Investigations
3 Grosvenor Road, Banbury OX16 5HN, England
tel./fax (+44/0)1295 261864
email - mobbsey at gn.apc.org
website - http://www.fraw.org.uk/mei/index.shtml
public key - http://www.fraw.org.uk/mei/mobbsey-2011.asc
-----BEGIN PGP SIGNATURE-----
Version: GnuPG v2.0.16 (GNU/Linux)
-----END PGP SIGNATURE-----
More information about the Diggers350