Oil: No Supply Side Answer to the Coming Crisis

Rather soon, we have to find mechanisms and processes to ensure an orderly and permanent annual reduction in world oil demand at least equal to expected net loss of supply as we come out of the ‘undulating plateau’.

One hangover from the neoliberal 1980s is the myth of ’supply side solutions’. For oil, the key target is to keep prices low as long as possible because “High oil prices hurt growth”. In practice, giving this myth some substance needs a sharp fall in economic growth and energy demand destruction.

After this, the myth goes on, oil prices will recover slower than economic growth, allowing a window of opportunity for building another fragile asset bubble. The key element, therefore, is demand destruction because supply growth is slow, underlining that so-called ’supply side solutions’ are in fact demand-linked and demand-constrained.

Without a certain period of destroyed demand, supply side responses cannot work.

Entry to the present and most severe economic recession since the 1929-31 run-up to the Great Depression and its late 1970s harbinger, the 1979-83 recession led to serious demand destruction for oil. Both also caused plenty of collateral damage right across the economy. Worse, however, is the fact that the coming opportunity window for generating another asset bubble will surely be shorter than in the 1980s, 1990s, or the post-911 asset bubble of 2002-2007.

Raise the Hammer