Sustainable energy


What Is the Connection Between Oil and GDP Growth?
Oil is the lifeblood of the economy:

  • In the 1960s Oil Supply Growth exceeded GDP growth.
  • From 1970s to 2005, OSG trailed GDP by 2 points.
  • 2005, Peak Oil, end of Oil Supply Growth, except for momentum the end of GDP growth based on Oil Supply Growth.
  • From 2005 the trend has been horrific. Worse if measured in foreclosures and banking system collapse.

Key Points

  • Economic collapse is causing further exploration curtailment
  • IEA has calculated that more than $4 trillion is needed if the oil industry is to meet projected oil demand by 2030
  • IEA warned in 2006: recent absolute increases in investment by oil companies are “illusory”, in relative terms, because of inflation in drilling costs
  • Most international oil companies actually cut exploration spending between 1998 and 2006, in spite of the rise in oil prices. ExxonMobil, BP, Chevron, and ConocoPhillips used more than half of their increased operating cash flow not on exploration but share buybacks and the payment of dividends to shareholders.
  • Curtailed investments (see Financial crisis hits global oil investment)
    • Sunoco scrapping refinery upgrade in Tulsa OK, plans to sell refinery with ~10% of US capacity
    • IRPC delayed a refinery expansion to 260,000 barrels per day and cut its run rate by 10,000 barrels per day to about 160,000-170,000.
    • Suncor Energy delays construction of oil sands upgrade
    • Petro-Canada may defer upgrade for proposed C$21 billion Fort Hills oil sands project to save up to C$10 billion.
    • Nexen Inc and Opti Canada delay decision on second phase of Long Lake oil sands project to some time in 2009. Expansion would double production of synthetic crude to 120,000 barrels a day.
    • Value Creation Group: construction of C$4 billion Heartland upgrade near Edmonton, Alberta, reported halted.
    • Baker Hughes Inc expects about 200 oil and gas drilling rigs in North America would be idled during the fourth quarter because of the tighter credit markets and the declines in oil and gas prices.
  • Massive investment of more than $26 trillion will be needed in the next 20 years to offset the impact of falling supply at aging oilfields and ensure the world has enough energy (IEA) (see IEA sees oil above $100, recognizes supply limit)
  • "There remains a real risk that under-investment will cause an oil supply crunch (by 2015)," the IEA said in an executive summary of the World Energy Outlook (WEO) to be released in full next week.
  • At oil prices of $50/bl or less, it becomes unattractive economically for exploration companies to drill in deep water or artic regions for oil. This halt in exploration activity could be felt in as little as a year, leading to reduced production worldwide. [Kunstler, Nation Chronicle, 1 Dec. 2008] Those fields require oil prices to be in approximately the $80/bl range to make production profitable.
  • Comment by Darwinian. Between February and August, 2008, OECD oil demand dropped over three million barrels per day, almost seven percent! EIA spreadsheet At the same time OPEC was ramping up production. This decrease in demand along with increase in OPEC production caused prices to crash. Remember, the market is sluggish. It does not respond day to day but takes sometimes months for a decrease in demand to crush prices.

The IEA warns of shortages - "The next oil crisis is coming"

  • A shortage of oil could trigger another global recession around 2013.
  • The reason is that investments in oil from new projects are being cancelled by large oil companies. If demand starts increasing in 2010, the oil price could explode, fire up inflation and put global growth at risk.
  • Data that shows that the global oil supply capacity is declining and that oil reserves will likely be markedly reduced by 2013.
  • "We could be steering into a new crisis which could be greater than the current crisis", said Mr. Tanaka, head of the IEA.
  • Oil companies are canceling their investments because at the current price of $40, they are barely profitable.
  • The investment levels are already down 25% from a year ago.
  • The IEA however is predicting markedly higher global demand. Almost half of the demand must be met by new fields, because existing reserves are declining more and more.

Jeff Rubin: Oil Prices Caused the Current Recession

  • Oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, and then some, to economies that sport the highest savings rates in the world.
  • One of the reason that Rubin doesn't feel that real estate problems are the cause of the current recession is because the geography isn't right. How could real estate prices in Cleveland cause a recession in Japan and the Eurozone?
  • By any benchmark the economic cost of the recent rise in oil prices is nothing short of staggering. A lot more staggering than the impact of plunging housing prices on housing starts and construction jobs, which has been the most obvious brake on economic growth from the housing market crash. And those energy costs, unlike the massive asset writedowns associated with the housing market crash, were borne largely by Main Street, not Wall Street, in both America and throughout the world.

IMF warns over parallels to Great Depression

  • The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.
  • This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund.
  • The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time.
  • The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations.

Some Economic Implications of Peak Oil

  • There is good evidence indicating that peak oil triggered the global economic crisis; that oil price was the limiting factor that broke the momentum as the global economy tried to keep expanding.
  • One subtle but important economic effect of rising oil prices is cost-push inflation, seen as stagflation during the energy crisis of the 1970s. This is a type of multiplier effect caused by the embedded cost of oil in goods slowly spreading price increases throughout the economy, seeming like a universal increasing tax.
  • There are at least three important problems with the current federal intervention strategy, which is a consensus action by the Administration, Congress, the U.S. Treasury and the Federal Reserve:
    • The politically possible stimulus funds are not in scale with a global crisis. The biggest investment banks are on federal life support; “So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table.” A Bulletin From the Captain of the Titanic.
    • The US economic remedy is national in character whereas the trade collapse is global. A central contradiction is that while new dollars are massively created to try to revive the domestic economy, the same dollars try to serve their traditional but conflicting role as the standard reserve currency basis for global trade, preferably remaining stable enough to maintain trade hegemony World leaders miss the target.
    • Not many economists seem to have a good grasp of peak oil and its economic implications. If current government economic policy succeeds in stimulating a renewed economic expansion, falling production will lead to another oil price shock. Reflating the global economy is almost certain to revive a bidding war for whatever oil remains accessible to the open market. See "US elections", #1101 ASPO NEWSLETTER No. 96 – DECEMBER 2008.

Peak oil and the end of economic growth?

  • Population growth and increased food production have both literally been fueled by ever more energy use, much of it wood or fossil fuel. This is not sustainable.
  • They have re-examined some of the data that led to the discrediting of the ‘limits to growth’ theory and have shown that both resource use and costs have only risen, and are no longer being mitigated by market forces.

Ask Jeff Rubin

  • I believe that the oil sand producers will ultimately have to pay for the carbon emissions they emit. At the same time, the Canadian oil sands is America's future oil supply so that the economic impact on the oilsands for paying for their carbon will be minimal.
  • Oil and energy usually costs more in canada than in the U.S., often because of government policies, but the fact of the matter is that we have a lot of energy.
  • You can point to a multitude of special factors behind triple-digit oil prices but the simple reality is that world oil demand is growing rapidly while supply has been stagnant. That equation is only going to get worse over time, leading to even tighter oil markets.
  • I think the new world will be a highly inflationary — not only because of the direct pass through of oil costs into final prices but more fundamentally, by reversing globalization and bringing manufacturing jobs back home.
  • We need a price of near $90 per barrel to generate a reasonable economic return on the billions of dollars a new oil sand project requires. And that's true for most unconventional oil projects around the world.
  • Canada will be an even more important energy supplier to the world (ie. US market) than it ever was in the past in a world of triple-digit oil prices because of all the oil it will pull out of the tar sands.
  • The future for human civilization doesn't have to be the back side of the Hubbert curve. Peak oil only condemns us to an ever falling standard of living if we insist on trying to consume as much energy as we did when oil was abundant and cheap. I am optimistic that people will respond to soaring oil prices by re-engineering their lives. And as more and more of us do that, we will, in turn, re-engineer our economy.

From a Failed Growth Economy to a Steady-State Economy

  • Cap-auction-trade systems for basic resources - Caps limit biophysical scale by quotas on depletion or pollution, whichever is more limiting.
  • Ecological tax reform - shift tax base from value added (labor and capital) and on to “that to which value is added”, namely the entropic throughput of resources extracted from nature (depletion), and returned to nature (pollution).
  • Limit the range of inequality in income distribution - a minimum income and a maximum income.
  • Free up the length of the working day, week, and year - allow greater option for part-time or personal work.
  • Re-regulate international commerce - move away from free trade, free capital mobility and globalization.
  • Downgrade the IMF-WB-WTO to something like Keynes’ original plan for a multilateral payments clearing union
  • Move away from fractional reserve banking toward a system of 100% reserve requirements.
  • Stop treating the scarce as if it were non-scarce, but also stop treating the non-scarce as if it were scarce.
  • Stabilize population. Work toward a balance in which births plus in- migrants equals deaths plus out-migrants.
  • Reform national accounts - separate GDP into a cost account and a benefits account.

Corporate Debt Coming Due May Squeeze Credit

  • 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.
  • The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.
  • “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Why Peak Oil Will Never Lead To $500/bbl Crude Oil

  • By 2012 the decline of production output from conventional sources coupled with much higher extraction cost of unconventional sources will lead to peak cheap oil, a phenomenon that will put extreme upward pressure on oil prices.
  • To a limited extent, a strong case exists for speculation on a moderate increase in petroleum prices.
  • Those who anticipate extraordinarily high prices (upwards of $300/bbl) have failed to consider what George Soros calls reflexivity. The global economy simply cannot afford such prices, and the rules will be changed before they are reached.
  • The future is likely to bring price controls, government intervention in the petroleum supply chain, and nationalization of oil resources.
  • The oil industry will face many unanticipated challenges during this period, capping the price appreciation potential of both commodity and equity plays in the oil industry.


Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License