The Peak Oil Crisis: The Next Price Spike

The peak oil thesis holds that the cessation of further growth in world oil production will be accompanied by wild price swings as the world attempts to adjust to the new state of affairs.

Now that mankind’s oil supply has not grown significantly in the last four years despite some very high prices in the interim, many people believe that the peak has arrived in the form of a bumpy plateau and will soon begin the inevitable fall that must come with the depletion of a finite commodity. To be fair, some optimists don’t see a significant decline coming for another 10, 20, 30 or more years, but few, including perennially optimistic government forecasters, predict significant further growth – at least not for conventional oil.

We already know something about the damage a contemporary oil price spike can do. In 2002, oil was selling for as little as $20 a barrel. In the next five years it rose steadily to reach $100 a barrel just as 2008 was beginning. The speculators jumped on board, the Chinese began stocking up for the Olympics and before you knew it, oil was over $140. As the US consumes roughly 20 million barrels of the stuff daily, our collective oil bill at the 2002 low was $400 million each day. By July 2008 the bill was up to $2.8 billion each day or a $2.4 billion daily increase. If you multiply this by seven, it means that collectively we had $16.8 billion less to spend on other things each week, or $72 billion less each month. Remember, two thirds of this money was being shipped out of the country to foreign oil producers. If that did not hurt our economy, at least a little bit, I don’t know what will.

Some revisionist writers are beginning to question the conventional wisdom that the current recession was caused only by a combination of excessive lending to unqualified borrowers and poor regulation of Wall Street’s leveraging practices. These writers are asking whether the cessation, or if you don’t want to believe it has peaked, at least the pause in the growth of world oil production might have had something to do with the rapid spread of a U.S. housing bubble to a world wide recession. Needless to say, the $4-5 gasoline prices of last summer brought some reduction in demand for oil when prices were high, and dampened sales of SUV’s and pickups. Nine months later, the bailout of Detroit was to cost the taxpayers $10’s of billions more – and the story isn’t over yet.

Falls Church News-Press