A Grim Energy Scenario

The world has to acknowledge the fact that there is a fundamental supply-demand imbalance for oil in the world economy. Worldwide production just about equals demand with no spare capacity for unforseen disruptions in the form of sabotage or shutdowns. I,for one, never believed in cartels, but the present spikes in the price of oil is a result of a demand driven one unlike the earlier ones, which were supply led crises due to political crises and resultant wars in 1973,1979/1980 and 1991. World economic growth is slow but steady, but demand is galloping at a fast pace in China, India and the Asian region in general, as it is well know by now that Asia will be the main flavor of growth in the near future. The earlier oil shocks in the 70's, though politically induced and thus supply driven, did induce the western world in particular to go in for unprecedented conservation measures with the result that the energy intensity i.e the energy required for a unit of GNP fell drastically throughout the 70's and 80's. This coupled with new discoveries in North Sea, Mexico and Alaska's Prudhoe Bay broke the stranglehold of the OPEC in world oil supplies and send prices into a tailspin in the mid 80's with oil touching a new low of $9 in 1986.This soft price regime, which continued till 1998... although with a brief intergennum in 1991...did lull the world into complacency, with the result this there was no incentive to scout for new energy supplies at a price below $ 20 a barrel. It is a moot point whether the low oil prices fired energy eficient growth throughout the 80's like it fired energy intensive growth in the 60's and early 70's. The analogy may not be apt. Another irony of the present rise in the price of oil is the absence of any inflation and induced recession like in the earlier ones. The situation can be easily explained away by the fact that after adjusting for inflation the price today is lower today than it was in the 70's. Another reason being proffered is the huge trade and budget deficts of the U.S have soaked the world with enough liquidity to enable it to pay for more oil and keep growing.The actual culprit-rampant U.S fiscal profligacy. The million dollar question is-: at what price will the price of oil induce a global recession. Many , even I, feel that nothing short of a recession in the U.S is likely to soften the oil prices and talk of a price level, with many pundits prognosticating at about $ 70-80, does not cut much ice. updated on 12/7/2008 The present runup in the price of oil defies any credible or rational explanation.Many economic seers are at a loss of words at the near doubling of oil prices when demand supply dynamics are just about even, and pass it off as risk premium or attribute it to a falling dollar or ,ironically to a substantial increase in demand from fast developing economies like India and China.There is no doubt that the US accounts for a about a quarter of the world oil consumption and that share is steadily falling. The massive conservation efforts under way in many oil importing countries may have the desired effect and oil willdefinitely fall to below $100 per barrel.But the moot point is - Will the world again be lulled into a sense of complcency as it did in the eightees when the price of crude fell from around $30 to around $9 - $10in 1986, and all the conservation and substitution efforts then underway, were jettisoned for cheap oil.I feel the oil importing countries should resolve to keep the import price of oil above $90 a barrel through import tarrifs whenever the price falls below a particular level, as the massive thrust towards conservation and efficiency and the quest for alternative sources like sand tar and shale and coal liquefication, such high prices spur , remains undiminshed. The World has to get used a higher base price of oil. All in all there is no alterantive to finding alternate sources of energy,be it fuel cells to power the automobiles which had been running on fossil fuels since the FORD Model T or any other host of bio fuels for which research is going on.