World economy runs — and stalls — on oil
Posted November 5, 2009 at 9:20 am 
Filed in: Economic Security, Energy Demand, Energy Security, Energy Supply This morning’s FT guest columnist Michael Rothman pens an interesting piece entitled, “Prosperity of the world hinges on oil.”http://www.ft.com/cms/s/0/34d8bf80-c8d2-11de-8f9d-00144feabdc0.html?nclick_check=1
That’s true and troubling at the same time. As writers in this space have repeatedly pointed out, much of the world’s oil, in a cruel cosmic joke, currently resides in countries and regions that are either hostile to democratic capitalism and freedom, politically unstable, or economically farcical. And some countries hit the trifecta of those qualities.
Unfortunately, as Rothman points out: “demand for oil has become the most signficant influence on the health of the global economy.” And while oil has historically fueled U.S. growth, Rothman believes that the “oil market cycle that began in 2003 is unlike any we have seen previously and suggests that the world economy may have become alarmingly dependent on the price of oil.” (emphasis added)
He notes that the “rally in oil prices that started the current cycle stemmed from fears about availability after three supply shocks in a five-month period took about 8 per cent of global oil supply out of the market in 2003.” Those supply shocks were caused by the Venezuelan oil workers’ strike, the second Gulf War, and rioting in Nigeria, and while they were transitory outages, they “generated fears about oil availability which were reinforced by other supply-side considerations” including ”the effective re-nationalisationof Yukos in Russia and indications that Iran was developing nuclear weapons.”
“In a market where fear drives oil prices, there are two possible solutions: a supply response, which in terms of the global oil market means an increase in supply from non-Opec producers, or a decrease in demand.”
Exactly. So what has happened in the supply and demand equation? Well, unfortunately there has not been much of a supply response and the demand destruction that has occurred has been as a consequence of the global recession rather than planned or voluntary conservation and the development of alternatives.
On supply, Rothman is interesting:
“This lack of a supply response from outside the Opec cartel illustrates the neglect of the oil industry over the last two decades, but, more importantly, it represents the first time since the second world war that the industry has not managed a meaningful supply response to higher average oil prices.”
And unless our strategy is periodic recessions to manage demand — probably not a good idea — the current demand side of the equation is bleak. As an historic matter, Rothman points out that demand destruction in the 1970s was the result of “heat and electricity generation was displaced by coal, natural gas and nuclear power” in a time when ”roughly 30 per cent of the world’s oil use . . . was for heat and power.”
That option doesn’t really exist today, since more than “70 per cent of global oil consumption is currently for transportation fuels, while a quarter is used for petrochemical feedstocks or specialty materials – neither of which can easily be replaced by alternative fuels.”
Alternative fuels, electrification, a focus on mass transit — those appear to be the very few tools available today to deal with the transportation sector’s insatiable demand for oil. And until we seriously avail ourselves of those tools, we are left with Rothman’s chilling close:
The “global economy is staring down the barrel of a series of boom-bust cycles that will be directly caused by the availability of oil.” Not a pretty picture.
Previous Post
February 6, 2012
January 30, 2012
January 29, 2012
