Oil and a Never-Ending Recession

The turmoil since August 2007 has not been blamed directly on oil prices but there's a link.
"The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession," wrote Steven Kopits, managing director for U.K.-based energy-consulting and -research firm Douglas-Westwood LLC in New York.

Kopits is a poster boy on all the "peak oil" websites and doomsayer blogs, but his metric on the link between recessions and oil price is interesting. If Kopits is correct, so much for "green shoots." They will be trampled under foot over and over again unless there is a sudden spike upwards in GDP growth disproportionally more so than oil price increases.Here is the roller-coaster cycle he points out: Higher oil prices mean recessions, recessions mean less consumption then lower oil prices, which leads to less exploration and supply which leads to higher oil prices and recession again.

Solutions? Stop driving

The reality suggests that there are only two antidotes to this vicious cycle. Gradual price increases mitigate the negative effect of oil price increases. Recessions follow jumps of 50% within one year. The Saudis and OPEC plus other producers would have to play a role in modulating prices. Or else consuming nations must reduce consumption dramatically through legislation, taxation and rationing. Or crude oil expenditures should not exceed 4% of GDP and this must be mandated by governments.

Here are some other Kopits' views affecting oil and economic conditions:

Kopits on supply: "If I dispassionately just look at the numbers, the oil supply has not improved that much since the 4th quarter of 2004. And I don't see anything on the horizon that makes it appear that we're going to break out into a really new level of production that's far different than what we have today."

Kopits on demand: "Consumption will tend to grow faster in developing economies for two reasons. First, by their nature, developing economies should grow faster than mature ones, and this has been generally true of east Asia and strikingly so in the case of China. So faster economic growth means faster growth in demand for oil. Further, oil consumption growth follows an "S"-curve. At low levels of GDP, oil demand growth is quite slow. Once a country has reached middle class income levels, per capita oil consumption stabilizes. However, in the middle, as a country becomes middle class, oil demand growth can be explosive. Take South Korea, for example. South Korean per capita oil consumption peaked in 1996; however, in the previous 12 years, the country's consumption increased nearly fourfold. China is now firmly on the S-curve. Based on South Korean experience, we would expect Chinese oil demand to stabilize at around 50 mbpd around 2032-2035."

(China currently 8 million per day, US 20 million, Japan 5 million).

Kopits on price: "If you have a flat -- or heaven help us, declining -- supply of oil, then the emerging and fast-growing economies will have no choice but to start bidding away the oil from the advanced or slow-growing economies. That is consistent with what we've seen in the data starting in about 2006. For China to grow, it will have to take away the oil of Japan, the US and Europe, just as it has in the last three years."

Comments

[hippie chucker]

If replacement of fossil fuels is the biggest cash prize in the history of mankind, don't you think that its a self solving problem?

If the "vested interests" cabal of oil companies and utilities has such a death grip on world affairs, how do we explain the success of the Prius?

A solution for fossil fuels won't come from conserving, or driving smaller cars, or reducing one's carbon footprint. It will come from capitalists who can make a product that fuels our economy cheaper than oil can, and that day is coming sooner rather than later.

Just hopefully without tax dollars supporting industry and picking winners and losers.

[vippy]

We could power the whole world with the photosynthesis battery, one hour charge would supply
the whole world for a year - so I have heard (Source "insideaut­omotive.co­m".) The USA immediately said "not in our lifetime."
Makes we wonder why they don't embrace or explore better ideas that would be cheaper for the population? Ergo I don't buy off on their scare tactics.

[AverageJoe-1]

We have no strategy except to assume that alternative, renewable, or energy-efficiency will compensate for the ensuing oil shortage. Then Senator Clinton was valid for having a long-term strategy and an interim strategy as a stop-gap for such new innovations. Instead, we assume that the innovations will automatically lead to a solution.

China, rightly or wrongly, has been buying up mineral and oil resources across the world (especially in Australia and politically senstive nations) because they are pragmatic and know that control of such resources are crucial to their economy. At the same time, they have been very proactive in implementing energy-saving products and technologies (or 'green' movement) that reduces energy-consumption. Most of their urban settings and cities have or will implement technologies in SSL or Induction that will reduce electricity consumption for lighting by nearly 40-80% to conventional technology that exists in the U.S. They have done it also for energy-controls and sensors as well. It is the same throughout Korea and Japan.......They also know that it will create 'jobs of the future' and are leading in such investments.

What are we doing about it? And where is the initiative for the 'green jobs' of the future?

[vippy]

We are currently swimming in oil and gas. Banks bought supertankers and stored oil offshore while it was cheap. Now they are selling it with a big profit. They closed so many refineries that makes me wonder why they lied to us last year and said we did not have enough refineries. Those refineries still operating are at a 85% productivity level - there isn't much demand. Yet our congress leaves us hanging with these high prices. Makes no sense to claim we are at peak, which happened already
5 times over the last 75 years if one follows the history. Why aren't our leaders addressing this problem, because it makes the figures look good. Remember, August's figures looked good in retail
because of gas and clunkers' program.

[leduck]

wrong
what doy ou mean "we are currently swimming in oil and gas?"
We may be swimminginoilbut it's production­rateisnotr­ising
world oil production has been flat since 2005

[TxAggie]

Vippy likes to shoot from the hip like that. "We" are not swimming in oil, "we" are importing 2/3rds of the oil we import- you know that, I know that, vippy should know that unless he is an Arab which means of course, he could be "Swimming" in oil.

[seawolf77]

What you are talking about which I have yet to hear a so called national stage politician voice and that is the oil depletion protocol. Once it is clear that production growth has stopped and oil has peaked and is in decline, not only will price go up and down dramatically but governemtn will have to come together and agree on who gets what. This will be the negotiation to end all. And of China does not get what it wants they will raise a 200 million man army and invade the middle east, just like it saya in the Book of Revelation. They're not going there for the jews or freedom or liberation or Liberace. They are going for the oil.

[vippy]

When the price of oil fell, Saudi and OPEC agreed to cut oil production. Over 75 years now we have heard PEAK OIL mentioned 5 times, first in the 1920s. Good source is "insideaut­omotive.co­m or Ed Wallace on AM 570 Saturdays from 0800 to 1300. People should learn not to fall for the scare tactics that only drive prices up. If the government was serious about oil usage it would have mandated more than 35 mpgs by the Year 2020. What a joke!

[sonofsamphm1c]

The higher price of oil does not mean recession. What it means is significantly better decisions will be made with respect to energy than this society has ever made in the past, a period of time in which our decisions have been pointblank stupid.

Cash for clunkers would not have happened if oil was the $25 that one of the HuffPo's regular commentators thinks it should be. Americans actually trading in gas guzzlers for fuel-efficient cars - and it was not an episode of "The Twilight Zone".

For Americans, higher oil prices are like vitamins for the brain dead.

[vippy]

And Obama said he will raise the fuel standard to 35.9 mpgs - give me a break. Europe has
like 45 mpgs and had it, why can't we have the same? The last energy policy passed had 35 mpgs by the Year 2020. If they were worried about anything seems to me they would mandate
50 mpgs like the GEO Metro. I do hope they come out with the 258 mpg electric car and they will be begging us to buy gas.

[sonofsamphm1c]

Europeans have made better decisions because they have had higher prices.

Many European cars get low mileage. They're not angels.

[AverageJoe-1]

I wish it was that simple. We as ordinary Americans can do more to save the environment, reduce dependency on foreign oil, and bring 'green jobs' to the country. Using DOE energy-star rated products can save significantly in terms of electricity that leads to lower Greenhouse factors-in terms of emissions, less landfill problems, etc.....

However, most people are unwilling to make the personal commitment because of the initial cost differential. You could buy a SSL lighting that will last around 3-4 X longer, reduce energy consumption by nearly 60-80% to current technology, and have a Payaback of less than 1 year. The ROI is around 80% for some of the alternative energy-efficient products. Buildings could be certified LEED but it would add an additional 10-15% upfront cost difference despite the immediate cost savings in terms of maintenance.

Conservation is a great value but not widely accepted if it is not cheap and someone else is not paying for it. By the way, states are beginning to see energy-effiicency incentives and rebates as a means of keeping businesses and making their state competitive to other states. However, funding is usually limited for such programs.

[sonofsamphm1c]

You are confirming what I'm saying. Cheaper alternatives lead to stupid decisions.

Americans are addicted to cheap energy. So much so that they have convinced themselves that recession is inevitable if there are high energy prices. It's simply false.