Blodget: It's Time To Start Freaking Out About Oil Prices  

Posted by Big Gav in ,

The Business Insider has a column by Henry Blodget worrying about now perpetually high oil prices- It's Time To Start Freaking Out About Oil Prices.

There have been so many other temporary emergencies in the world over the past few years that it's easy to overlook a permanent one:

Oil prices.

Right now, much of the global economy is weak... and oil is still over $100 a barrel! A few years ago, when oil prices first hit this level, the news came as an absolute shock. And soon, when gas hit $4 a gallon, the entire national conversation changed.

(It didn't change so much internationally, because, thanks to gas taxes, other countries already charge way more than $4 a gallon for gas, so oil price moves don't have so huge and visible an impact on driving costs).

Specifically, $100+ oil caused many Americans to buy different cars and drive less. And it put a choke chain on the economy, throttling growth. And, shortly thereafter, the economy tanked. And then, of course, oil prices followed the economy down, allowing everyone to focus on other more pressing emergencies.

But then, with even a crappy economic recovery from the depths of the financial crisis, oil prices soared again. And now they're back to near-emergency levels, even with the global economy sputtering. ...

Yes, if the global economy goes back into recession, oil prices will drop again. But the drop will be temporary. And if the economy ever threatens to start growing at its full potential, meanwhile, oil prices will likely keep right on going up. Until they choke off growth again.

And so on.

It has gotten to the point, in fact, that oil prices may start to act as a natural Central Bank on the world economy--raising costs when the economy starts to heat up and cutting them when it cools. And that would be fine...if we could maintain reasonable oil prices when the economy was running at a healthy rate.

But the economy is not running at a healthy rate right now, at least not in Europe and the United States. And oil prices are already over $100 a barrel.

So we hate to think what will happen if and when we finally do see a vigorous economic recovery.

McKinsey Quarterly has a look at ways companies can prepare for an era of high oil prices - Another oil shock? (free subscription required to read the whole article).
It’s been a while since the world has been truly preoccupied with the threat of sustained high oil prices. The global economic recovery has been muted, and a double-dip recession remains possible.

But that dour prospect shouldn’t make executives sanguine about the risk of another oil shock. Emerging markets are still in the midst of a historic transition toward greater energy consumption. When global economic performance becomes more robust, oil demand is likely to grow faster than supply capacity can. As that happens, at some point before too long supply and demand could collide—gently or ferociously.

The case for the benign scenario rests on a steady evolution away from oil consumption in areas such as transportation, chemical production, power, and home heating. Moves by many major economies to impose tougher automotive fuel efficiency standards are a step in this direction.

However, fully achieving the needed transition will take more stringent regulation, such as the abolition of fuel subsidies in oil-producing countries, Asia, and elsewhere, as well as widespread consumer behavior changes. And historically, governments, companies, and consumers have been disinclined to tackle tough policy choices or make big changes until their backs are against the wall.

This inertia suggests another scenario—one that’s sufficiently plausible and underappreciated that we think it’s worth exploring: the prospect that within this decade, the world could experience a period of significant volatility, with oil prices leaping upward and oscillating between $125 and $175 a barrel (or higher) for some time. The resulting economic pain would be significant.

Economic modeling by our colleagues suggests that by 2020, global GDP would be about $1.5 trillion smaller than expected, if oil prices spiked and stayed high for several years.

But like any difficult transition, this one also would create major opportunities—for consumers of energy to differentiate their cost structures from competitors that aren’t prepared and for a host of energy innovators to create substitutes for oil and tap into new sources of supply.

Furthermore, if we endured a period of high and volatile prices that lasted for two or three years, by 2020 or so oil could face real competition from other energy sources.

The UK Daily Telegraph is quoting BP chief Bob Dudley talking about the risk high oil prices pose to economic recovery in the US - Bob Dudley says high oil prices threaten economic recovery
.
Mr Dudley said that US consumers were on track to spend $200bn more on oil in 2011 than they had done last year, due to the higher crude prices. He said that US consumers would be the first to feel the effects of rising crude prices because fuel taxes in the country were so low, leaving only limited potential to lower prices at the pumps through tax cuts.

Oil prices were pushed up at the start of 2011 by instability resulting from the Arab Spring and have remained above $100 for most of this year.

Strong demand from Asian countries, which Mr Dudley said was "holding up", has helped to keep the prices high, despite the eurozone crisis threatening economic slowdown.

However, if oil prices did negatively affect the US economy, the impact would reverberate globally, he warned. "A downturn in the US affects goods and services from China, India and indeed this region [the Middle East], particularly if energy demand is affected."

Mr Dudley said that the energy industry needed to add the equivalent of one large oil producer like Saudi Arabia every five years if it were to offset the decline in output from existing fields.

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