Sunday, 13 March 2011

Oil price hike - it's not just Libya

Commentators have fixed on Libya as the explanation for the latest oil price spike - but this is a trigger, not the cause of a crisis that will only be (temporarily) relieved by a slowdown in world economic growth. The underlying cause is simply that expansion in oil supply activities is unable to keep pace with the expansion in demand for oil.
The discussion about 'peak oil' probably oversimplifies what has been a rather more subtle trend since the 1970s that expansion of supply of oil has increasingly been unable to keep pace with demand. The oil crises of the 1970s were initially resolved by world economic recessions, especially at the beginning of the 1980s, but then the  oil supply issues were ameliorated by technological shifts away from using oil as a fuel source. Countries around the world stopped using oil in electricity generation, less oil was used in industry and less oil was used for  heating. This technological shift gave the world the false impression that there were no more oil supply pressures. Oil prices fell, and also fuel efficiency of vehicles, which had risen during the 1970s and early 1980s, fell once again.

The problem the world faces now is that demand for oil use in transport, especially motor vehicles, has continued to surge, with there being no expected barrier to this continued expansion - that is short of considerable oil price increases which choke off demand and induce people to buy more energy efficiency motor vehicles. This is the underlying problem - Middle Eastern political crises are triggers that make a chronic problem into a crisis. The point is that this present oil price spike would have happened anyway, perhaps in one or two years' time, regarded of political developments in the Middle East.

The problem that the world has now is that the market will not deliver the required technological shift away from oil use in transport any time soon. The market response is to induce purchase of more energy efficient vehicles, but only so long as oil prices remain very high with an ever-present danger of oil price spikes which lead to recessionary consequences. In this situation there is no such thing as 'sustainable' economic growth in any sense of usage of these terms. Indeed, the economic outlook for the coming period is bleak in that a world economic slowdown seems inevitable. Then only way this oil crisis will be resolved is likely to be by economic recession.

Of course Governments could do more interventionist action - although it seems for many US Republicans you probably have as much chance of persuading them that Karl Marx was not such a bad guy after all as to convince them of the necessity of immediate tight restrictions on motor vehicle fuel efficiency.  The US actually did some of this in the 1970s with 'Corporate Average Fuel Economy' (CAFE) regulations - but things have moved on since those days when regulatory action by the state was not regarded as being quite so much the work of the Devil as it is viewed today.

In fact even such action will not be enough on its own. We need a shift towards electric cars. The state could help shift this in the right direction by incentivising so-called 'extended range' engines.  These use a small petrol (gas) engine to power an electric motor with a small battery that can be used for small range travel and topping up the engine. These fit well into an electricity system powered by variable (renewable) electricity sources. These energy sources will never run out, unlike fossil fuels and nuclear power.

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