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Can things still get worse? Projections when the economy recovers are nothing more than educated guesses. The U.S., Europe, Japan as well as BRIC states and most other countries are in serious trouble. The global economy has taken a very serious beating. Ditto oil prices.

At the moment, low oil prices are beneficial to stabilize the economy by leaving more money to consumers. However, here’s a good piece of advice for drivers: Don’t get used to low gas prices! They won’t stay for long…

Most of us got it. That’s the reason why demand for gas-guzzlers hasn’t picked up yet despite much cheaper gasoline. Last year’s oil price spike was kind of an eye-opener. When gas climbed above $4 a gallon, it became clear that GM, Ford and Chrysler have serious problems.

Now the International Energy Agency (IEA) warns that we’re moving towards an even worse downturn in 2013. In fact, the IEA fears that a mega-recession is just around the corner. The IEA is concerned that once the economy recovers, an oil supply crunch is inevitable because most oil companies postponed or cancelled exploration projects and other necessary investments into oil production facilities and the oil infrastructure that’s rusting away. Consequently, we’re likely to see oil prices skyrocket again which will kill economic growth.

What I’m concerned about is that while low oil prices help to stabilize the economy right now, rising oil prices can prolong the current crisis. The price of oil will pick up soon. It’s not a question of whether but when. If oil prices recover faster than the economy, the consequences will be disastrous. At the end of the day, the combination of a slow, modest recovery and surging oil prices can turn this recession into a “lost decade” for America. To avert this worst case scenario, it’s important that President Obama has the political support he needs to push forward his plans for a more sustainable energy future. (check out What does not kill us only makes us stronger) If Obama manages to double the share of renewable energy in the U.S. energy mix within the next three years, the U.S. will be less dependent on oil. However, the effect of skyrocketing oil prices will still be painful.

It remains to be seen whether China, India or even the United States will be the first to recover from the financial crisis. Another important factor is OPEC. The Organization of Petroleum Exporting Countries has already agreed to cut oil production by 4.2 million barrely a day since September to push prices up. On top of that, they said that its members have already delayed 35 new oil projects because of low oil prices. These days, oil demand is contracting for the first time in 25 years (according to the IEA). Although OPEC can increase their output when necessary, however, Christophe de Margerie, CEO of Total - Europe’s third largest energy group - said that the world will never be able to produce more than 89 million barrels of oil a day. The IEA’s Executive Director Nobuo Tanaka reminded us recently that global oil reserves and the overall production capacity are shrinking. As the IEA already admitted indirectly in the WORLD ENERGY OUTLOOK 2008 (my summary of the WEO 2008), global oil production is “at plateau” and to meet demand in the future, we’ll have to make enormous efforts to exploit deepwater oil fields, oil sands, etc. and increasingly, renewables and nuclear power will have to fill the gap. The report shows that oil production is in decline at 580 of the world’s 800 largest oil fields. As oil production from non-OPEC countries is declining even faster, OPEC’s influence will grow and energy security will become ever more expensive. In the medium and long term, Canada will play an important role as a major supplier of oil, but we should keep in mind that oil from Canada is much more expensive because it takes a lot of energy to separate it from the sand.

On the one hand, Canada is a more reliable partner than Venezuela or Iran for instance, but many exploration projects in Canada are behind schedule due to postponed investments. Many projects have become unfeasible with oil below $60 per barrel.

Foolishly, politicians had ignored the problem until last year. Luckily, the new U.S. President Obama takes today’s energy challenges more serious than most of his colleagues and could turn the United States into the leader in energy technology. Dependence on oil imports is a threat to national security and to prosperity, getting away from oil is a powerful opportunity.

You might also be interested in this post:

it’s time to become energy independent, overhaul the entire economy and infrastructure

For further information:

Peak Oil: “Waking to a New Reality”

http://www.peakoil.com/printout46488.html

This entry was posted on Sunday, March 1st, 2009 at 5:14 PM and is filed under Energy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.