Since the middle of February oil prices have increased by some $22 a barrel. As the U.S. currently consumes just over 19 million barrels of oil a day, that means collectively we are now spending about $420 million a day more filling up our fuel tanks than we were two months ago.
Now some of us are wealthy enough to absorb this increased expenditure without a second thought, and some just tuck the added cost away on their credit card statements in hopes there will come a day when they can afford to pay it off. For most however, these higher fuel costs, and of course the higher food and nearly-everything-else bills that go with it, are being covered by foregoing other expenditures that are not an essential part of our lives.
Unlike the price spike of three years ago, when oil prices climbed from $70 a barrel in late 2007 to a peak of $147 in July 2008 and then collapsed to less than $60 a barrel by the end of the year, this time prices have been moving steadily higher since March of 2010. Much has happened since the 2008 oil price spike that has left the U.S. and global economies different places than they were three years ago.
The bursting of the housing and financial bubbles and the subsequent government bailouts in many OECD countries left most governments at all levels in dire straits. Unemployment rates in many OECD countries have risen and for many incomes have fallen considerably as workers have been forced into lower paying jobs. Polls suggest that as many as 50 percent of American families have had some sort of financial setback in recent years.
Into this milieu we now have added higher oil prices. Moreover, given the increasing unrest in many Middle Eastern states, continued robust economic growth in China and India, and despite the deterioration of Japan's economy in the midst of its tsunami/nuclear radiation crisis, it seems the balance of forces driving the oil markets will result in still higher prices before the year is out.
Now this is a message that the world's financial markets and chambers of commerce simply do not want to hear, for it implies that in the not too distant future there will be another economic downturn. In recent days there has been a spate of stories in the financial press trying to make the case that all is not lost and that economic recovery will continue despite increasing energy costs.
Most of these stories talk of the "fear factor" and point out that some, or perhaps much, of the increase in oil prices is due to speculators betting on major disruptions in Middle Eastern oil exports in the near future. Others harken back to 2008 and point out that prices will be peaking any day now due to falling demand. Indeed, the sharp drop in oil prices earlier this week, after the Saudis confirmed that they had cut production by 800,000 b/d in March as the markets were "over supplied," would seem to support this thesis.
A few commenters maintain that this early in the "economic recovery" we will not be hurt by high energy prices. Others believe Americans have become accustomed to $4 gasoline prices and that we Americans will continue to spend away merrily on discretionary consumption knowing that recovery is just around the corner.
In its newest formulation the International Monetary Fund says that if the growth in global oil production falls by one percentage point from its historical average of 1.8 percent a year, then global economic growth would fall by only an acceptable 0.25 percent a year.
However in a ground-breaking statement last week, the IMF says oil has entered "a period of increased scarcity," which "arises from continued tension between rapid growth in oil demand in emerging market economies and the downshift in oil supply trend growth."
As some observers have noted, this statement sounds a lot like a description of peak oil. The case that severe economic damage will result from increasing oil prices is pretty straight forward. China and India are likely to continue growing their economies until they are stopped by an outside force such as a severe global economic decline, declining natural resources or perhaps even the consequences of climate change. China, of course, has the money to buy as much oil, coal, food, and other raw materials on the world markets as it needs. Despotic Middle Eastern governments can delay but not stop unrest in their region. There are limits to how much driving America and other motorized societies can give up given that the automobile is imbedded in our lifestyles.
Last week the International Energy Agency released a new assessment noting that OPEC has failed to respond fully to the loss of Libyan oil exports and that tighter oil markets lie ahead. With the summer driving season that is usually accompanied by a 2-3 million barrels a day (b/d) increase in the demand for oil drawing near, prices seem destined to move higher -- unless, of course, a major economic decline comes first.
U.S. oil consumption is currently about 2 million b/d below the highs reached in the mid-2000s. The next round of oil consumption cuts in US will be more painful and therefore likely to be slower in coming. Joining a carpool or taking public transport will be an option, albeit an inconvenient one, for some but this is unlikely to have much economic impact. The problem will come when large numbers of motorists start to bypass motoring trips that normally would involve other expenditures - vacations, tourism, shopping, eating out, etc. Then the economy begins to have a real problem for businesses will suffer, jobs will be lost and a downward spiral will begin. It is no wonder that many want to think or write about the obvious consequences of ever increasing oil prices.
Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.