Lost at sea

It is crucial for those warning others about the dangers of peak oil to look at the effects of increasing oil prices (graph left) on economic growth. For some years to come, peak oil constraints will be manifest in the oil price, not in disruptive, recurring and systemic spot shortages—at least in the United States. What effects have oil price increases had on real U.S. GDP growth in the last 7 years? To be honest, nobody really knows—yet. We will all find out eventually.

There is no peak oil supply shock until world production of oil derived from fossil fuels production (crude + condensate + gas liquids) actually begins its irreversible decline sometime in the next decade. Until then, the correct answer to most peak oil inquiries is price, price, price as slow or no supply growth coupled with ever-higher energy costs creates more and more unsatisfied demand. Substitutes and efficiency measures (e.g. plug-in hybrids) will not save our bacon, despite what optimistic policy wonks and pandering presidential candidates say (NPR’s Morning Edition, April 7, 2008).
Oil is not like iPhones. No studies link real GDP and iPhone price trends. Keith Sill, a senior economist1 with the Philadelphia Fed, tells us why oil prices are important in his The Macroeconomics of Oil Shocks.