2010 May 04 Tuesday
West More Sensitive To Oil Price Rise

Talking with Kate Mackenzie of the Financial Times Francisco Blanch, head of global commodities research for Banc of America-Merrill Lynch, says developing countries are less sensitive to the price of oil than developed countries. Developing countries get more utility and economic growth from an additional barrel of oil.

What kind of price level do you see being too high?

I would think that any number above $100 a barrel is going to be difficult to manage [for the western economies].

The emerging economies have a higher threshold.

Can you explain the difference between the emerging and developed countries’ thresholds?

The marginal productivity of oil is higher in emerging markets. If Europe consumes an extra barrel a day, Europe will not generate much extra GDP on the back of that, whereas an emerging economy will be able to generate much more on the back of that.

I agree with this analysis. The demand for oil in China grew thru the recession. China and India continue to displace European and American demand for oil by bidding it up so high that the high prices cause demand destruction in the West. This trend will continue.

Growing emerging market demand is one of the reasons why availability of oil in the West will drop faster than world production once world oil production goes into decline. Prepare yourself to get out of the way of the oil demand building up among a few billion people in Asia and the Middle East. Reduce your dependence on oil while doing so is still a voluntary act on your part and you can adjust less painfully.

Reading retired Princeton U geologist Kenneth Deffeyes makes me think world oil production has already peaked. What matters at this point is the slope of the downhill production curve.

Share |      By Randall Parker at 2010 May 04 12:59 AM  Economics Energy

SF said at May 4, 2010 10:52 AM:

For China and India, perhaps.. I think there were African nations relying on oil for power generation that were really crippled during the price spike.

Sycamore said at May 4, 2010 7:03 PM:

How much, though, does the African demand matter, quantitatively? Surely it doesn't compare to Chinese demand?

Chinese growth is simply a lot faster than our growth. For that reason I find the point of view in Randall's post pretty plausible prima facie.

Randall Parker said at May 4, 2010 7:14 PM:

Sycamore, Yes, Africa is too small a source of demand for its response to higher oil prices to matter much. What matters are the developing Asian countries.

The OECD countries consume a dwindling fraction of total produced oil. That trend is going to continue. We will hit a series of recessions caused by oil price spikes. Each time we'll drop to a new lower level of oil consumption.

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