Question: What sort of decline rate to you anticipate, in 2012 or whenever it occurs?
Kopits: I don’t have an independent view on that. The IEA has pointed out that decline rates appear to have increased to 6-7%, and PFC has a very interesting chart on the increase in decline rates from offshore wells over time. By the way, these sorts of developments—secular increases in decline rates, for example—are one reason that I think peak oil is upon us already. Are they proof? No, but they are suggestive. And if you work in the industry, you keep running across similar charts, indicative of a system in trouble even if they are not conclusive. At the same time, you have to keep in mind that there are above-ground constraints on production which could influence aggregate decline rates. You have to consider, for example, whether the Saudis will increase production or if Iraq will get better at administrating its oil industry. There are a lot of things we don’t know at this point that will determine decline rates.
Question: Could you tell us about your views on the US oil price threshold for recessions?
Kopits: The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.
Then we are within $10 per barrel of another recession. Bummer dudes.
I predict many recessions (or a few really long ones) in the next 15 years. Shrinking oil supplies will be the biggest cause.
Question: In the world of oil analytics, what rules does peak oil break?
Kopits: The primary thing that we have learned—or more precisely, re-learned—in the last year is that the global economy will not tolerate oil at any price. In the first half of last year, we had some prognostications of oil at $150, $200, even $500, and they were understandable because of the supply and demand dynamics at the time. But as we’ve seen since, once our oil consumption exceeds 4% of GDP in the US, we go into recession and we cut our oil consumption. The global economy cannot sustain oil at any price. Beyond a certain threshold, the result is likely to be stagflation or recession rather than perpetually increasing oil prices.
Kopits isn't the only oil industry analyst who thinks oil can't go above $100 per barrel for any length of time. The argument is that high prices will cause economic contraction down to a level that crushes enough demand to lower oil prices back below $100 once again.
But I think this line of thinking misses a fundamental change that high oil prices will cause: In industrialized countries oil consumption will shrink more than overall economic activity and oil's portion of total energy will shrink. As oil becomes a smaller portion of the total energy pie oil's price will be able to go higher without turning into 4% of GDP. Therefore as global oil production declines oil will eventually go above $100 per barrel on a sustained basis.
Economist James Hamilton has done a lot of analysis on the effects of oil price shocks on the US economy and concludes we would not have experienced the current sharp recession without the 2007-2009 oil price shock.
In a follow-up on my earlier post, I'd now like to discuss the second part of my paper, Causes and Consequences of the Oil Shock of 2007-08, which I presented today at a conference at the Brookings Institution. Here I'll review the role that the oil price shock may have played in causing the economic recession that began in 2007:Q4.
My paper uses a number of different models that had been fit to earlier historical episodes to see what they imply about the contribution that the oil shock of 2007-08 might have made to real GDP growth over the last year. The approaches surveyed include Edelstein and Kilian (2007), who examined the detailed response of various components of consumer spending, Blanchard and Gali (2007), who studied the extent to which the contribution of oil shocks has significantly decreased over time, my 2003 paper, which emphasized the role of nonlinearities, and a model-free data summary of the observed behavior of different economic magnitudes following this and previous oil shocks. Although the approaches are quite different, they all support a common conclusion: had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the U.S. economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.
If we experience a double dip recession another spike in oil prices will be the cause.
|Share |||By Randall Parker at 2009 September 17 10:29 PM Economics Energy|