Without remembering history, we walk blindly from day to day. While we all have moments of blindness, like forgetting to bring water to summer hoops games in the park, I want to make sure that we don’t lose sight of the energy big picture unfolding in 2008. Quick price corrections like the last two weeks for oil and natural gas can sometimes allow policymakers to lose sight of the forest for the trees.
Even if the price of oil does fall to $90 per barrel early next year as Lehman Brothers predicts, such a price would mark a 25% increase from the average price last year. Thus, prices have gotten so out of control this year that a 39% drop from the record $147 would still equal a continuance of the bullish oil price trend since 2002. It would allow us to keep most of our airlines for at least a few more months but would not change the fact that oil consumption in China, India, Russia, and the Middle East are set to devour any new supply the market can produce. China, which has been the key to global demand growth these past several years, shows little sign of slowing down their oil appetite. First half of 2008 car sales resumed phenomenal expansion at ~18.5% to ~5.2 million vehicles sold. Based on current trends, they are set to overtake the US as the largest vehicle market in the world by the mid-to-late 2010s. And all of those vehicles will need fuel. For those that doubt similar robust growth continuing, I recommend you not be too skeptical. China just passed the US in number of internet users by growing over 50% in the past year to 250+ million users. All the while, their economic “slowdown” has brought predictions of sub-10% growth, compared to sub-1% growth in the US. And China is not alone. The Russian auto market shot up 41% in early 2008 to overtake Germany as the largest market in Europe, and India car sales are growing faster than 12% per year.
So, while a recession in the US can cause a price correction as big or bigger than the last couple of weeks, they do not change the big picture that massive demand pressure approaches from emerging economies and oil producers while supply shows few prospects for growth. The only thing I think stands in the way of $250+ oil is serious energy policy mixed with private initiative to lower oil consumption in the US and beyond through efficiency and substitution into ubiquitous renewables.
Natural gas has a similar story, with consumption wanting to rise at a faster clip than supply can provide. But more short-term relief came today in the US as the price fell further due to a strong inventory injection last week that brought levels closer toward the five-year average.
An alarming article on the dismal state of US airlines estimates that airlines need $80 oil to resume profitability in their current form. But that price is very close to the rising marginal cost of new oil production and therefore may not ever be seen again except for during recessionary periods when demand has stagnated worldwide. My refrain: the solution to the oil crisis is found in a Sustainable Energy Transition.
Tags: China, energy, oil prices