2024-05-29 2:10 PM

Our wish has been granted for we are indeed living in interesting times. The world’s economy is either collapsing or is putting on a very good imitation of doing so.

Production of cheap, abundant fossil fuels is peaking and will soon be withering away, yet gasoline for our cars has almost never been inflation-adjusted cheaper. Around the world, numerous sovereign governments are close to becoming dysfunctional — likely with very bad consequences. We are pumping so much of the wrong kinds of gases into the atmosphere that the poles are melting, the seas are rising, the land is drying out and some day soon this planet is going to be very tough to live on. On top of all this, the world seems to be acquiring a fair number of people who are convinced that only they understand God properly and that the rest of us deserve to be done in. The only good news is that, so far as we know, there are no large meteors heading towards earth that would render the foregoing problems irrelevant.

The purpose of reciting a list of woes is to remind ourselves that we are living on one big interrelated, interconnected earth. Attempting to solve one problem will either mitigate or perhaps exacerbate the others for nothing much remains static these days. Economic growth has come to a halt in most countries and even China’s meteoric growth is subsiding towards half what it was a couple of years ago.

How long this will last is anybody’s guess. While Wall Street babbles on about rebounds in six or maybe nine months, others are convinced that the damage done to the world’s financial systems in recent years is so great that, despite the trillions in bailouts and stimuli, there is no hope for recovery in the foreseeable future. Those of us who worry about such things are concerned that low oil prices have stifled new investment to such an extent that in a few years the oil industry will find it impossible to stem declining production from natural depletion.

In recent weeks, the idea of a short recession that will be over in a quarter or two seems to have been replaced by near-universal pessimism. If part of your job is to be eternally optimistic in order to sell things, then you will say that the economic situation will start to get better next year. If you are allowed the freedom to expound on realities, you will say we are in for an unknown, likely lengthy, period of unknown hardships.

In the last six months, oil prices have fallen by an unprecedented amount and are currently bouncing around $40 a barrel depending on the news of the day. This decline clearly is because supply began outpacing demand last summer and there is a widely held belief that as the world economy contracts, the demand for oil will contract faster. While it is true that the demand for oil is no longer growing, the available numbers do not suggest that, as yet, it is exactly “collapsing” either.

This week the U.S. demand for oil is officially reported to be down about 4 percent as compared to last year. Gasoline consumption is down only 2.1 percent, which does not seem to be much for a country that is laying off people by the millions and where all but the poorest of the poor drive cars as part of their daily existence. A fair guess is that the consumption of gasoline is so deeply imbedded in the American way of life that the economy is going to have to get a whole lot worse, and prices are going to have to get a whole lot higher, before we see more impressive declines in oil and gasoline consumption – say on the order of 10 or 20 percent.

Although the growth in China’s demand for oil is slackening, it is still up, with December 2008 consumption 12 percent higher than December 2007. Actually Beijing knows a bargain when it sees one and is busily buying up crude to stash away in its new strategic reserve.

The International Energy Agency, which is sort of the official keeper of the world’s oil statistics now acknowledges that a global recession is in progress but only sees world oil consumption for 2009 falling by 500,000 barrels a day (b/d) to 85.8 million. While these projections will be revised again and again during the year, at the minute they do not suggest anything that could be characterized as a “plunge” in the demand for oil. Despite rather impressive increases in U.S. stockpiles that have many convinced that demand is disappearing, the IEA reports that total stocks in the OECD countries, while above normal, actually went down by 2 million barrels in November and likely dropped another 8 million in December.

As prices plunged this fall, OPEC met, and met, and met again, each time announcing production cuts which they all swear they will implement. Considering that the unprecedented drop in oil prices has shattered their leaders’ plans for power, prestige, glory, and economic development, they appear to be so desperate that they are likely to make a substantial portion of the announced 4.2 million barrel production cut. Some OPEC members are becoming so desperate that they are already calling for another cut that would bring the total to 5 or 6 million b/d.

Thus, the big unknowns for 2009 are just how far and how fast the world’s GDPs are going to fall and just how fast the demand for oil will fall with them. It is obvious that if demand falls by only the officially projected 500,000 b/d, or anything close to that number, and production actually goes down 4 or more million b/d, then by every known law of economics oil is not going to stay at $40 a barrel, but is going to rise, perhaps even soar. For now we can only wait and watch.





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