Oil, Gas, the Economy–our Next President

Canadians have just be told to expect $1.50/liter gas within the year. (One liter = .25 gallons.)

According to GasBuddy, the lowest price in Ontario is now $1.09/liter. In Atlanta, Georgia it is $2.88. Using simple math and disregarding proportional taxation, that will put Atlanta close to $4.30/gallon.

But that is only the beginning of the bad news, according to the CNW Group, within five years oil is expected to top $150/barrel.

The report predicts that surging demand in developing economies combined with accelerated depletion of existing supply and widespread delays in getting new oil fields up and running will see the global supply of oil fall as much as eight million barrels a day below U.S. Department of Energy and International Energy Agency estimates by 2012.

The arguments for me are persuasive:

Depletion from existing fields has accelerated to over four per cent, a rate that currently cuts nearly four million barrels per day out of each year’s production.

The second fundamental force blowing up supply forecasts is the huge project delays and massive cost overruns associated with many of the world’s largest new oil mega-projects.

Delays bringing new sources on-line have been the norm. Additionally, technically challenging fields (oil sands, Sakhalim II, Kashagan) are facing increasing costs. “Cliff-like” depletion rates have already hit the such as the North Sea, Cantarell, etc.

Then consider the following:

  1. Rising demand in developing countries as they become more “car-centered”–Russia, China, etc.
  2. Subsidization of oil prices in oil producing countries, putting a lid on demand destruction in the those countries.

The article does not mention how gas is priced in China. In order to facilitate its great industrial leap, China has subsidized oil. China wants the car–and it will not be denied.
The summary is instructive:

The result of this unchecked soaring demand in most oil-producing nations means they will not be able to add any additional exports to meet the surging demand in developing countries. Since crude demand in countries like China and India is far more income-elastic than price-elastic, these countries are likely to outbid OECD markets for increasingly scarce global supply. The OECD, the largest global oil market today, is much more price sensitive and oil consumption, which has already fallen over the last two years, will decline by almost four million barrels per day over the next five years in response to steadily rising prices. In the U.S. alone, with soaring crude prices pushing the cost of gasoline to US$4.50 a gallon, Mr. Rubin expects American demand for oil to drop by 10 per cent or nearly two million barrels a day by 2012.

Americans, of course, are quick to blame the oil companies of price gouging, especially Democrats. Republicans, on the other hand, like to think that oil is infinite. Neither is the case.
Ask yourself: What are the economic consequences? How precisely are we going to dodge the recessionary bullet, let alone recover from it? Demand destruction is easy to talk about, but what are the economic consequences?
And what do you think the oil producing countries will do as their subsidization grows ever more expensive?
The next president is going to face real head winds. Is there a candidate who will tell the truth?