Friday, December 4, 2009

The upcoming oil shortage: part one

From the 07 December 2009 Greater Niagara Newspapers

By Bob Confer

In last week’s column it was discussed that the primary reason for the strength and depth of the Great Recession was the sub-prime mortgage crisis. It should be noted, though, that there would have been a recession regardless – though considerably smaller and less damaging – due to incredibly high oil prices.

Economic output, as measured in units and not revenues (which were actually higher because of heightened energy input costs), tanked at the end of 2007 and in the first nine months of 2008 because the cost to recover natural resources, convert them into materials and finished goods, and get them into consumers’ hands increased considerably, making for higher prices at grocery and department stores. The consumers could not or would not buy as many of those goods because their spending power decreased in that same period, the result of gasoline prices reaching – even exceeding - $4 per gallon in the United States.

This energy-driven economic crisis (dwarfed by the financial crisis) was a result of the laws of supply and demand. In the years that led up to that peak Americans consumed oil at unfathomable levels thanks to multi-car households outfitted with so-called “gas guzzlers”. As they did that, they continued to buy astronomical amounts of non-durable and disposable goods that could be made affordably in China and India where peoples’ burgeoning personal wealth – a result of the nearly endless production jobs – caused them to develop the consumptive tendencies of Americans. They bought goods. They bought cars. They used oil. This put a serious strain on oil supplies as the world’s largest economy and its two most-populous nations devoured oil produced from a system that was not made to satisfy such impressive needs. Consequently, high demand for a limited supply made for higher prices. After breaking the $100 per barrel barrier in February of 2008 oil made steady gains to just over $145 per barrel during the summer months.

Since then, oil prices have ridden a roller coaster. In September of that year, ‘round about the time the financial markets started their free-fall, prices fell below $100 per barrel for the first time in 7 months. At the end of 2008 and into February of 2009 oil traded in the $30 to $40 range, a direct result of the breakage of the aforementioned supply constraints: Demand (real or anticipated) decreased as a result of consumers and businesses the world over cutting back (somewhat drastically) on their energy use.

But, as 2009 went on prices rose, reflecting an up tick in demand. The world outside of the USA has begun a slow recovery and China, quickly becoming the force to reckon with in regard to international politics and trade, has seemed almost impervious to the global recession. Its air of invincibility has equated to a growth in GDP that is expected to finish above 7 percent in 2009 and 8.5 percent in 2010. India has been just as productive, with its growth estimated to top 6 percent this year and 7 percent next year. Because of this return to economic development globally, oil prices have risen to around $80 per barrel.

When America’s economy gets back on track and the 7 million recently unemployed become employed again – thus commuting our roadways and buying things – it will burden the oil supply chain as it did prior to the escalation of the recession. But, by then, which is some years down the road, supply will be further strained by the newfound demand of millions of new consumers around the globe.

In 2007 and 2008 it was evident that the oil markets were ill-prepared to satisfy the needs of the world and the world suffered for it. And, as we’ll see in next week’s column, little has been done to address that situation, foretelling an inability to maintain a productive and sustainable economic recovery at home and abroad.

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