Monday, April 19, 2010

The Economic Calamity of Peak Oil

There are dangerous economic implications associated with the world's growing addiction to oil. As we face the reality of declining supplies, spikes in the price of oil imperil the recovery and threaten the economy.

In 2008 the price per barrel of oil went over $140, then the price plunged to less than $50 barrel by the end of the year. In the coming months, oil prices should increase due to peak oil theory and the ongoing rebound of the global economy. Many are predicting oil prices of around $100 per barrel by late May/early June, coinciding with peak summer demand.

Goldman Sachs believes that crude shortages will re-emerge as supply fails to keep up with demand recovery. Barclays and Bank of America are both predicting $100 per barrel this year.

China and India's appetite for oil continues to grow while the recovery fuels global demand. This is a recipe for unprecedented oil price increases that could cripple the global economy. Besides the inevitability of a declining supply, regional conflicts can profoundly disrupt oil supply.

Fossil fuels have a hugely detrimental environmental impact and unless we invest in renewable energy on a massive scale, peak oil panic will have dire economic consequences.

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1 comment:

Anonymous said...

Any discussion about peak oil and oil prices over the next decade must include an attempt to quantify emerging economy demand as an important driver at the margin. Here is a simple thought experiment using Chinese demand to give some idea of the magnitude of the supply issues we face:
- China moves from 3 bbls/person/year to the South Korean per capita consumption level of 17 bbls/person/year
- Transition takes 30 years
- No peak in global production

In next 10 years we must find 44 million BOPD. If you superimpose peak production on top of this demand profile using the following parameters oil prices would increase approximately 250% in real terms over next 10 years:
- Oil demand elasticity of -0.3
- Current production 84 million BOPD, current price US$ 80
- Peak production 100 million BOPD
- Post peak decline rate of 3-4%

If you want to try the model for yourself using your own assumptions it can be found at Petrocapita Income Trust: