The Barrier to an Economic Recovery

As retirement accounts shrink, jobs become more difficult to find, houses are foreclosed upon and the nightly news is dominated by talk of recession, the price of energy has been one bright spot for people struggling to pay their bills.  While prices of gasoline have fallen by 50% since the middle of the summer, the ultimate cause has not been any below-ground factors but rather the economic slowdown itself.

 

According to the EIA, total oil consumption in August 2008 was a significant 8.36% lower than August 2007, and the lowest amount consumed in a month since 1998.  The principal reasons given for this change are the slowdown in the economy, the impact from the hurricane season, and adjustments made in response to sustained gas prices over the summer.  Because of this drop off in demand, oil inventories have been rising steadily over the past few weeks, indicating continuing weak demand.

An economic recovery is expected at some point, but will it be met this recovery be met with another rise in energy prices, straining consumers and limiting the potential for growth?  There will be many factors that determine the answer to this question.

First, the cause of the current drop in demand will be an indicator of the impact of future economic growth on oil consumption.  If it was due to adjustments made to high gasoline prices, this would indicate that demand is much more price-elastic than many thought, creating the possibility for future change.  If we are about to enter a period where many are both losing their homes and their jobs, this may also be a unique opportunity for long-term adjustments.  With many now realizing that cheap oil was a thing of the past, people may now look to work closer to home, and to reverse trend towards exurban development.

On the supply side of the equation, both economics and geology could limit the amount of oil available in the market during a recovery.  The crash in the per barrel price of oil has recently caused OPEC to consider cuts in production in attempt to keep oil at a higher level.   In addition, the recent drop makes new projects unprofitable in the Dakotas, the tar sands, the oil shale, and in deepwater drilling sites.  Many of these projects were only viable at $80 or more, and some still have other serious constraints, such as the vast amounts of water needed to produce tar sand oil.  Both of these factors could possibly inhibit the ability of production to respond effectively to demand, ultimately putting upward pressure on prices.

Even in the event that new projects are brought online, there is the geological question of whether it is feasible to expect an increase in production.  Mexico, Venezuela, Russia, and even Saudi Arabia are experiencing worries about their ability to increase or sustain production.  Most data suggests that we are already near the peak in world oil production.  The deciding question will be whether we can achieve prosperity as a nation without a growth in energy.

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3 Responses

  1. This really points out how important it is to not view sustainability as some sort of luxury good that we can worry about in happier times. If we are going to climb out of this recession and achieve lasting prosperity, then recovery has to go hand-in-hand with sustainability.

  2. […] It is true that if the credit market is allowed to contract without any guidance, it will mean less investment across the board, including sustainability projects, but we cannot allow this market failure (see this for how it might happen). However, even though investment plays a role, that’s not the whole story. Instead, as the name indicates, sustainability is always asking “is this behavior/law/project destructive to our future on this planet?” This is why this is not merely a competing concern in the budget, and it is not something that we should abandon because of economic hardship, but simply an idea. It should guide our public policy in a comprehensive way so that we emerge from this crisis not as a tired nation of decaying infrastructure and resources but as a nation that will lead the world into a lasting age of prosperity. (for more on how sustainability is crucial to economic recovery, see here) […]

  3. Related article

    Energy crunch may offset recovery, experts predict
    http://www.chron.com/disp/story.mpl/headline/biz/6156443.html

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