A Glass Ceiling on Economic Recovery: Peak Oil in 2014-2015

Spindletop, Texas, 1902

As per the contention of Peak Oil proponents, the economics of oil supply and demand will act as “a glass ceiling” to economic recovery, hastening demand for alternative energy sources sooner than many expect, according to a new study released by the New Economics Foundation (NEF).

“Sustained high oil prices and price spikes will have a significant impact on the economy,” with global energy demand on the rise and oil production slowing, according to NEF’s, The economics of oil dependence: a glass ceiling to recovery: Why the oil industry today is like banking was in 2006, which is available free for download on the UK’s independent think tank’s website.

The economic threat this poses is as real and of a magnitude akin to that of the banking crisis that occurred in the middle of the past decade, the NEF report authors contend:

“Without bold and imaginative action, the consequences will cast a shadow on generations to come. Unemployment, underfunded essential services, recession, and depressed and crippled economies provide daily reminders of what the future will hold.”

Economic Peak Oil: The effect of high prices and price spikes

The price of oil would need to double over the next decade in order to slow the rate of decrease in production, according to NEF’s analysis. This would usher in a period of “economic peak oil,” which it defines as “the point at which the cost of incremental supply exceeds the price economies can pay without significantly disrupting economic activity at a given point in time.”

This in turn will result in economic stagnation and inflation globally, with resulting hardships. NEF takes a new approach to determine the likely timing of the economic peak oil phenomenon, though it finds both its and the conventional approach—which takes new capacity, subtracts depletion and balances that with a most likely growth trajectory—indicate that 2014-2015 as the likely “crunch period.”

Cheap, or at least affordable, fuel for transportation has underpinned globalization of commerce and industry, and NEF argues that we’re facing not an energy or oil crisis, but “a crisis related to the cost and availability of transport fuels…which account for up to 80 percent of all oil usage.”

Countries dependent on oil imports stand to suffer the worst, facing two threats outside of their control, the report authors continue. One is increasing oil consumption in the big oil exporting countries. The world’s largest oil exporter, Saudi Arabia, for example, is consuming more and more of production domestically as its population continues to grow rapidly, exporting “less oil in 2011 than it did in 2005 or even 1985,” despite large production increases.

Second, some oil importers will be able to better absorb a higher oil price, and be willing to pay more for it. Countries including China, according to NEF, “are thought to be able to tolerate prices in the $100-$110 per barrel range,” whereas $90 per barrel “will have a significant economic impact,” in countries including the US.

Three energy paths: Choose wisely

Three paths are open if such an economic contraction and hardship are to be avoided, according to the report authors: finding and exploiting new sources of low-cost oil; improved efficiency of oil use; or transition to a low carbon economy. It’s only the third that would also contribute to addressing other potential crises in the social and environmental spheres, however.

Moreover, transition to a low carbon economy is the only option “likely to meet the magnitude of the challenge,” they assert. Critically lacking is the political leadership and policy certainty to effect such, however.

NEF recommends the UK government employ “available and new mechanisms for public sector finance, such as a Green Investment Bank to change investor behavior in favor of new, low carbon sectors. Adaptive responses such as investment into mass public transit systems, more efficient vehicles, people traveling less due to home working, and cheaper, low carbon energy alternatives will also help,” they write.

Main image credit: Rock-Drill-Bit.com

Featured post image credit: n2teaching, courtesy flickr

Andrew Burger
Andrew Burger
A product of the New York City public school system, Andrew Burger went on to study geology at the University of Colorado, Boulder, work in the wholesale money and capital markets for a major Japanese bank and earn an MBA in finance.

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