Will energy show us that inflation and deflation can occur at the same time?

…What may turn out to be truly scarce is energy. There is no Wall Street paper mill that can turn it out as it does various securities. It can only be obtained through skilled, energy-intensive and highly complex processes. Right now the precipitous drop in world demand for energy has pummelled energy prices. What is not so obvious is that low prices and contracting credit are leading to low investment in the oil and gas fields, in the coal fields and in alternative energy technologies and deployment.

Even while many factories may now stand idle, the oil pumps, the natural gas pipelines, and the coal trains are still working relentlessly around the clock to bring us the energy resources we need and are therefore depleting the existing reserves in the ground. Without enormous and continuous investment, the energy industry cannot hope to keep up with this scale of depletion. Already for the past three years, record high prices for oil failed to conjure any additional daily production capacity into existence. Oil production was just about flat for the entire period.


With the ultralow prices we are experiencing now, the necessary capital will simply not flow to the energy industry to replace the reserves we are depleting or invest in alternatives to replace finite fossil fuels which will all reach a peak some day (perhaps soon) and then decline. (Many say that world oil production peaked in July 2008 and may never rise to that level again because of a combination of geologic constraints and the drop in investment in new productive capacity.)

So, my candidate for a surprise comeback this year or next is energy, even if the economy as a whole deflates more or just limps along at this level. If it happens, policymakers and the public need to see it for what it is: a certain sign that we are close to the end of the fossil fuel era. Even with the very high energy prices of this decade, we have not been able to build up the large inventory of new fossil fuel discoveries that might have been expected. It is getting harder and harder to find, extract and refine the nonrenewable energy sources that the world economy relies on for 86 percent of its energy. When the ongoing decline in energy supply capacity unexpectedly crosses with energy demand, that fact will be made plain for all to see if they want to see it.

Energy Bulletin