I haven’t ever seen the GDP of a major economy fall as quickly as Japan’s did in the 4th quarter of 2008. It fell at an annual rate of 12.7% October-December and shows that the fall in energy prices, especially oil, during that period made a lot of sense. The economy and corresponding energy demand is falling faster than depletion rates at most oil fields and the question is: “Will demand continue to fall throughout 2009?”
It took four years for US GDP to fall 25% in the Great Depression. Yet Japan’s economy is currently falling at twice that rate. Will it stabilize at current levels or are we in the beginning of the first global depression since the 1930s? The head of the IMF used the d-word to describe the advanced economies of Japan, Europe, and the US. But we will see how it turns out.
With non-OPEC oil production expected to stagnate rather than fall a few % in 2009, this year’s depressed energy demand seems to require OPEC to make another production cut soon. The cut should probably occur before the winter is over, especially since mild Spring and Fall weather translates into less heating oil demand in the Northern Hemisphere and lower cooling loads in the Southern Hemisphere. The determinant of the extent of global energy demand’s fall lies in the growing economies like those of China and India. Since India is less export-oriented, they seem to be less affected than China. India is projected by the International Energy Agency (IEA) to have demand growth of ~3% (.1 million barrels per day (Mbd)) in 2009. China’s demand growth is forecast to only be 1.1% ( still a significant .09 Mbd) due to a large fall in exports and related energy demand for industrial production.
The US Energy Information Agency (EIA) now predicts a global demand drop of ~1.2 Mbd this year. But figures like those coming out of Japan may show that global demand will fall even further. This puts serious bearish pressure on oil prices in 2009. But then there will be bullish pressure in 2010 or whenever the global economy recovers because the price is so low many producers are cutting back and letting oil field decline dominate the supply picture going forward.
As I wrote a few weeks back, Saudi Arabia alone could cut output enough to make up for a 5% fall in global demand on top of the ~2 Mbd cut it has already made. And Russia may cut its production this year if prices fall below $35 consistently. Their production is already down ~.8% in January due to natural depletion, a rate that could accelerate due to a market response to prices and/or a governmental response to produce less.
Bottom Line: The rapid fall of Japan’s economy may be a harbinger of further bad economic news globally. This has a short-term bearish impact on prices and translates into lower greenhouse gas emissions. But the only way we keep prices and emissions from shooting up once economic stability returns is through continued focus on efficiency and renewables aided by comprehensive international climate policy such as an emissions cap and tradable international permits.
In the meantime, I will keep you updated on the latest economic and energy information that determines prices and emissions in the months ahead.
Tags: depression, energy prices, Japan, recession