Peak Oil

High Oil Prices Could Threaten Recovery

By Ryan McGreal
Published April 14, 2010

Those dirty hippies over at the Financial Times are worried that rising oil costs, squeezed between rising demand and tight supply, could stall the economic recovery. In an article published on April 8, Gregory Meyer and Michael Mackenzie warn:

This week oil climbed to $87 a barrel, its highest level since October 2008 and prompted concerns that triple-digit crude was once again in the offing.

This was after a period of eight months when oil traded between $70 and $80, a narrow band that pleased oil producers without hurting consumers too much.

Such Wall Street firms as Barclays, Golsman Sachs and Morgan Stanley predict that oil prices will approach or exceed $100 a barrel by next year.

On the downside, rising oil prices "could ripple through the economy and financial markets" to drive inflation and prompt central banks to start raising interest rates.

On the upside, this could be a great time for energy investing (again):

Nicholas Colas, ConvergEx Group chief market strategist, says: "With crude oil prices marching steadily higher, portfolio exposure to the energy sector could well become a key determinant of overall investment performance through the balance of 2010."

If oil prices remain high but stable, consumers will be able to respond sensibly to it while energy producers will have an incentive to continue investing in new capacity and renewable alternatives.

However, another rally in oil futures would produce another super-spike like the one that peaked in July 2008 just under $150 a barrel.

That spike pushed the world economy into a sharp recession, after which point demand sagged and the price of oil collapsed into the mid-$30/barrel range. Prices recovered steadily over 2009 and have been trading around $80/barrel for several months.

The difference today is that most of the cheap home equity that sustained consumers through 2007 and 2008 is already gone, replaced by tight credit and steep debts.

(Note: FT requires that you sign up for a free account to read their articles. Someone should tell them about the internet.)

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By jasonaallen (registered) - website | Posted April 14, 2010 at 10:22:52

I thought it interesting that Michael Hlinka (sp?) on CBC's Metro Morning today quoted Jeff Rubin about almost all of the economic slowdowns in the 20th century being due to oil shocks - still Michael failed to address Rubin's main hypothesis which is the reason for the price spikes this time around - Peak Oil.

Between Rubin's weekly column in the Globe, Richard Heinberg's Op Ed piece in the National Post last week, and others - this is starting to get on the public's radar - but it seems to be taking almost as long as it took for the Climate Change issue to gather public attention. Unfortunately, the timelines on this issue (because we are starting so late) are quite a bit shorter. I've got my fingers crossed that people in public policy positions will wake up sooner rather tnan later.

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By JonC (registered) | Posted April 14, 2010 at 22:21:03

This little gem from the United States Joint Forces

http://www.jfcom.mil/newslink/storyarchi...

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day."

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By Ryan (registered) - website | Posted April 14, 2010 at 22:42:31

^Lots of gems in that report, JonC. Thanks for posting. Here are some more:

To generate the energy required worldwide by the 2030s would require us to ind an additional 1.4 [million barrels per day] every year until then.

And:

The discovery rate for new petroleum and gas ields over the past two decades (with the possible exception of Brazil) provides little reason for optimism that future efforts will find major new fields.

And:

A severe energy crunch is inevitable without a massive expansion of production and reining capacity. While it is dificult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India. At best, it would lead to periods of harsh economic adjustment. To what extent conservation measures, investments in alternative energy production, and efforts to expand petroleum production from tar sands and shale would mitigate such a period of adjustment is dificult to predict. One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.

Of course, the US easy-motoring itself, for now the world's biggest consumer of oil and by far the world's biggest per-capita consumer of oil, could well end up as one of those totalitarian regimes if they don't undertake the major structural changes necessary to reduce their exposure to high oil prices.

The Obama administration talks a pretty good game about sustainability, but their capital spending patterns indicate that they're still just as much in thrall to the American-way-of-life-is-not-up-for-negotiation delusion as the Republicans.

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By LL (registered) - website | Posted April 15, 2010 at 21:31:06

It's interesting to see the predictions of the "peakniks" play out pretty accurately. As an early adopter of peak oil awareness (I made a presentation to council on it in 2003), I admit I feel pretty vindicated sometimes.

However, after reading quite a bit of economic analysis from the Left (Leo Panitch's stuff in Upping the Anti, Promissory Notes, some of David Harvey's stuff), I'm convinced that oil prices were not the root cause of the crisis, nor were bad finance practices - though these played a catylist role.

Real wages have been going down for years. Debt: what else do you expect. How can workers buy back all of the value that they create?

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