Is oil hindering the world economy?

Brad Plumer has a good piece about "Peak Oil" and how it may already be putting the brakes on the world economy.

Quote :

The debate over peak oil can get pretty slippery at times. Geologists will point out the (obvious, banal) truth that there’s a finite amount of oil out there beneath the rocks and, at some point, we have to reach maximum production. Economists and other peak-oil skeptics, for their part, will say that markets can always adjust. If current supplies dwindle and oil gets pricier, then companies will find it profitable to drill for harder-to-extract oil in the Arctic and Canada’s tar sands and elsewhere. No big deal. Yet often it seems like the two sides are talking past each other.

Perhaps a clearer way of looking at matters, though, comes from petroleum economist Chris Skrebrowski, who argues that peak oil is best defined as the point at which “the cost of incremental supply exceeds the price economies can pay without destroying growth.” In other words, eventually the world will max out on production of the cheap, easy oil — the stuff that comes from Saudi Arabia and other OPEC countries. At that point, as long as demand for crude keeps growing, prices will rise and we’ll have to resort to more expensive oil from the Arctic and tar sands and so forth. And those higher oil prices will cripple the global economy. On this view, then, “peak oil” just means the point at which the price of crude acts as a hard ceiling on growth.

In Harvard Business Review, Chris Nelder and Gregor Macdonald concur with this view, arguing that we’ve likely already reached this impasse. Production of “conventional” crude, the easy-to-drill-stuff, seems to have hit its peak in 2004, maxing out at about 74 million barrels per day. And, since oil demand — fed by growing countries like China and India — isn’t letting up, that means the slack has been taken up by unconventional sources like natural gas, heavy oil, and tar sands from places like Canada.

One big problem with these new sources is that they’re costly, possibly too costly for comfort. “We have ample historical evidence that when petroleum expenditures reach 5% of GDP, recession typically follows,” Nelder and Macdonald write. “Annual energy expenditures rose from 6.2% of U.S. GDP in 2002 to a painful 9.8% in 2008, which was immediately followed by an economic crash. And now oil is sending energy expenditures back above 9% of GDP, just as we see fresh indications that the recession persists. This is not a coincidence.”

Does that mean we’ve finally hit the point where oil is seriously constraining our ability to grow? Perhaps, though here’s another twist. Michael Levi counters that expensive oil, in and of itself, isn’t necessarily a hindrance to growth. After all, the United States has had quite a few years where petroleum expenditures exceeded 5 percent without whacking the economy (in the early 1980s, for instance). The real killer, Levi argues, is volatility. “What does appear to play a large role, particularly in the 1970s [recessions], is a rapid increase in oil costs that temporarily overwhelms the economy’s ability to adjust.”

And it appears we’ve reached the point where rapid swings in price is a persistent problem. In the old days, Saudi Arabia had plenty of spare capacity and could always flood the market with extra oil if supplies got pinched. But that's no longer the case. Global demand is growing too quickly, and the Saudis are running out of spare capacity. Nor will new, unconventional sources alleviate the problem entirely. That’s why, Levi and Robert McNally recently argued in Foreign Affairs, “Wild fluctuations in global oil prices are here to stay.” However you want to define peak oil, it looks like we’re in for an uncomfortable ride.

http://www.washingtonpost.com/blogs/ezra-klein/post/defining-peak-oil/2011/10/06/gIQABuLgQL_blog.html?wprss=ezra-klein

IMO the sooner that we at the individual level, the community level, the nation state level, and the global level reduce our dependance on oil the better off we will be in the long run.

Great article. Thanks

This is an interesting piece by economist James Hamilton.

Quote :

A rational reason for high oil prices

"There is no rational reason for high oil prices," writes Ali Naimi, Saudi Arabian Minister of Petroleum and Mineral Resources, in today's Financial Times. Well, I can think of one-- if oil prices were lower, the world would want to consume more than is currently being produced.

The graph below plots total world oil production over the last decade. After growing rapidly in earlier years, production hit a bumpy plateau. In November 2007, just before the U.S. recession began, the world was producing 84.9 million barrels each day, a little less than was produced in the spring of 2005. Although production stagnated, the demand curve continued to shift out, with world GDP growing 5.3% in 2006 and another 5.4% in 2007. Consumption of petroleum by China alone was 800,000 barrels/day higher in 2007 than it had been in 2005, meaning the rest of the world had to decrease consumption over this period.



Growth in oil production resumed after the recession, with world oil production up 2.8% in 2010 over 2009. But world GDP grew 5.1% that year, suggesting demand was once again growing faster than supply. And oil production hit a new snag in 2011, primarily due to disruptions in Libya...

...How much would we have expected the growth in world GDP over the last decade to have increased the quantity of oil demanded if buyers had not faced any increase in price? The answer to this question could be calculated if we knew the income elasticity of demand, which measures the percentage increase in demand that results from a 1% increase in income. A study by NYU Professor Dermot Gately and Stanford Professor Hillard Huntington in 2001 concluded that for 25 OECD countries over 1971-1997, the average income elasticity was 0.55. But for emerging economies and the oil-exporting countries (which are responsible for most of the growth in global GDP over the last decade), the income elasticity is closer to 1.1-1.2.

In the graph below, I plot annual world oil production in blue along with an estimate in red of what demand would have been if the oil price had not risen over the last decade and if one assumes a world income elasticity of 0.75. The reason the actual quantity consumed today is around the blue line rather than the red is because the price today is not the same as it was in 2002.



The question is not whether there is a rational reason for high oil prices, but rather whether there is a rational reason the world is not producing 100 million b/d today. And if anyone knows the answer to that question, it should be Saudi Oil Minister Ali Naimi.

http://www.econbrowser.com/archives/2012/03/a_rational_reas.html

High gas and oil prices may be here to stay.